The hits just keep coming for Coinbase (NASDAQ: COIN), the largest United States-based cryptocurrency exchange, after being slammed with a $350-million patent infringement lawsuit.
On September 22, the Wyoming-based Veritaseum Capital LLC filed a complaint against Coinbase in the US District Court of Delaware on behalf of Reginald Middleton, the inventor who exclusively licensed the rights to his patents to Veritaseum. The suit seeks “at least” $350 million in compensation from the “substantial profits” Coinbase has allegedly generated via its infringement on Middleton's intellectual property.
In December 2021, Middleton and Matthew Bogosian were awarded a US patent (the “566 patent”) titled Devices, Systems, and Methods for Facilitating Low Trust and Zero Trust Value Transfers. The technology covered by the patent “provides a computing device, system, and method in which a transaction (ie, ‘crypto' payment, trading, staking, etc.) between a first client device and a second client device can be processed via a transfer mechanism which includes a decentralized digital currency.”
The suit alleges that Coinbase “had prior knowledge, should have known or at least been willfully blind of the ‘566 Patent.” The suit further alleges that Coinbase “has been on notice of the ‘566 Patent at least as early as July 3, 2022, if not earlier from other sources or parties.”
The suit virtually encompasses all Coinbase products and services, including trades involving BTC, BCH, Litecoin, and other tokens. However, much of the case centers on Coinbase's embrace of allowing its customers to stake ETH via the Ethereum blockchain's new proof-of-stake (PoS) validator-based consensus mechanism. In August, Coinbase said its future prospects would rely heavily on ETH staking to help reverse its $1.1-billion net loss in Q2.
The suit alleges that Coinbase infringes on the ‘566 patent by “providing products and services including the payment of block rewards to new Validators under PoS, payment of Validators from transactions on the Solana network (which relies on a pseudo-PoS mechanism), and the transfer of (non-fungible tokens) from one party to another party on the Coinbase platform.”
Middleton and Veritaseum aren't exactly unknown—or uncontroversial—figures in the digital asset space. In 2019, Veritaseum Inc reached a $9.5-million settlement with the US Securities and Exchange Commission (SEC) for issuing a fraudulent initial coin offering (ICO) that raised $14.8 million in 2017. Middleton was accused of lying to investors about fictitious deals that would increase the value of the VERI token while simultaneously engaging in manipulative trades to pump VERI's value.
Middleton previously sued US telecom giant T-Mobile for its alleged role in facilitating a SIM-swap scam that suspectedly cost Middleton $8.7 million in lost BTC tokens. That suit remains unresolved, the parties having been sent to arbitration last month.
Coinbase has yet to publicly comment on the Veritaseum suit, possibly because it's far from the only legal action Coinbase is defending itself against. Other complaints range from shareholders accusing the company of gross mismanagement to class actions by customers locked out of their accounts at inopportune moments by the exchange's wonky infrastructure. Meanwhile, the SEC is reportedly probing Coinbase for listing tokens that qualify as unregistered securities.
Coinbase Credibility Solutions
Any disruption to Coinbase's staking operations could seriously undermine the company's turnaround strategy. Investment banker JPMorgan recently lowered its price target for Coinbase shares based on analysts' view that “falling cryptocurrency markets” will continue to limit the exchange's trading volume. Coinbase's volume is currently only around half the sum the exchange enjoyed at the start of 2022, as the ongoing crypto winter has frozen many traders while deterring new entrants.
Coinbase shares were flat on Monday, closing at $62.28 after briefly topping $82 mid-September. The company has endured a raft of bad news since then, including last week's Wall Street Journal report that the exchange had tapped “at least four senior Wall Street traders” to speculate on cryptocurrencies using Coinbase's own funds via a new unit called Coinbase Risk Solutions.
Last December, Coinbase told Congress that it doesn't act as a market maker or conduct a proprietary trading business. That may have been technically accurate at the time, but the Journal reported that Coinbase was sufficiently concerned regarding its revenue downturn that it completed a $100 million transaction earlier this year. According to “people close to the matter,” the transaction was labeled a “test trade” that ultimately failed to convince Coinbase to pursue proprietary trading permanently.
Clearly aware that this report was coming, Coinbase's official blog responded within hours of the article's release, saying that while it “does, from time to time, purchase cryptocurrency as principal … we do not view this as proprietary trading because its purpose is not for Coinbase to benefit from short-term increases in value of the cryptocurrencies being traded.”
The blog post went on to say that the Journal had confused “client-driven activities” with proprietary trades, insisting that “our incentives and our clients' incentives are aligned by design.” The post claimed that Coinbase Risk Solutions only offers “assistance in managing risks and participating in protocols” for crypto-wary institutional investors with a goal to “expand institutional participation in web3 beyond HODLing.”
What's good for
General Motors Coinbase is good for America
Coinbase's share price remains at around one-sixth of its post-Nasdaq listing peak. Despite this drastic plunge, Coinbase chief executive officer Brian Armstrong recently insisted that going public in the spring of 2021 was the right decision because, as a Fortune 500 company, others on that list “treat us more as a legitimate force out there.”
Armstrong offered that opinion during a Q&A with Ryan Selkis at last week's Mainnet 2022 event in New York. The event, put on by crypto market intelligence service Messari, also saw Armstrong claim that Coinbase's US market-leading status meant he felt a responsibility to “be a champion for the whole industry and defend the whole industry.”
While Armstrong's defensive moves—such as bankrolling a lawsuit by aggrieved Tornado Cash users against sanctions imposed by the US Treasury Department's Office of Foreign Assets Control—may earn him brownie points from crypto bros, it's earning the public scorn of Congressional “crypto” critics. Last week, Senator Elizabeth Warren (D-MA) told a Senate committee hearing that Coinbase was supporting those who are “fighting to have the chance to keep right on laundering money.” Ouch.
Armstrong made headlines a couple of years ago when he warned Coinbase staff not to engage in “political and social distractions” that might divert them from the primary mission of growing the exchange. Armstrong said such initiatives carried the risk of “creating internal division” and had the “potential to destroy a lot of value at most companies.”
Flash forward to the present, and Armstrong sings a somewhat different tune. Two weeks ago, Armstrong revealed that Coinbase had begun “integrating our crypto policy efforts right into our app.” US users will now be informed of “crypto sentiment scores from members of Congress” thanks to a scorecard that will help “pro-crypto candidates solicit donations” and also help the crypto community “rally to engage elected leaders and drive sensitive policies.”
Armstrong's dismissal of his employees' political and social concerns while trumpeting his self-interested efforts to build a “crypto” cohort of single-issue voters struck many observers as the height of hypocrisy. Let alone the fact that some of the pols getting top marks from Armstrong have been widely criticized for backing debunked “stolen election” theories that many view as contributing to the dismantling of American democracy.
So, there you have it. Armstrong wants to use his platform to steer users into voting for something that may be of some modest short-term financial benefit to them but is enormously important to ensure Coinbase's ongoing existence. And all you have to give up is your freedommmmmmm! Honestly, it's no wonder the guy looks like a Lex Luthor stunt double.
Ask me anything! No, not that
Armstrong is set to hold a YouTube “ask me anything” session on October 5, although the session is dubbed “Crypto's Future in Australia” to help promote Coinbase's upcoming launch of its Australian-focused exchange. And Armstrong's definition of ‘anything' apparently is n't as absolute as his support of him for anti-democratic crypto legislators, as he's already nixed any questions regarding Coinbase's share price, future financial performance, and several other trend areas.
Meanwhile, despite the extensive depreciation of Coinbase's shares over the past year, few company principals have proven willing to stake their fortunes on the theory that the shares are undervalued. In fact, of the insiders who sold off vast quantities of their holdings around the share's peak price, none have seen the wisdom in buying back some of those shares over the past four months.
Since mid-August, only one director—Shopify CEO Tobias Lutke, who only joined the board at the end of January—has purchased any Coinbase stock, snapping up nearly 35,000 shares at an average price of around $76 ($14 higher than their current price). Have to wonder how long the rest of the board will wait before taking him aside and letting him know that their public declarations that a turnaround is imminent aren't actually to be taken seriously.
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