What's in a name? According to purchasers of one "stablecoin" cryptocurrency, nothing but false advertising.

Those purchasers have now filed a class action lawsuit in California federal court against cryptocurrency exchange Coinbase and GMO Trust, the issuer of the GYEN cryptocurrency at issue, alleging that the two falsely marketed the stability of the currency and caused millions of dollars in investor losses after the truth emerged.

A payment stablecoin is a type of cryptocurrency that is designed to maintain a stable value relative to a national currency or other reference asset and be redeemable for fiat currency. As alleged in the complaint, GMO Trust represented to purchasers that the cryptocurrency GYEN was "pegged" to the Japanese yen at a one-to-one rate, and that since it was being backed by a government-issued currency that is traditionally considered quite stable, it too, would be stable.

GMO Trust further marketed GYEN as an investment that can "virtually eliminate volatility" and repeatedly promoted the stability of the currency. According to the complaint, Coinbase, too, touted GYEN's parity with the yen to promote the cryptocurrency.

However, the purchasers allege that when GMO Trust made these representations, it and Coinbase knew that GYEN's "peg to the yen was prone to break and that such an event would be likely, if not certain, when GYEN opened for trading on Coinbase" in November. According to the complaint, GYEN had collapsed months earlier on other exchanges, but the defendants hid its volatility risks from purchasers.

This volatility manifested almost immediately, allege plaintiffs. After rising sharply when Coinbase first allowed trading of the asset on its exchange, at one point reaching seven times the value of the yen, GYEN plummeted dramatically, "falling 80 percent in one day" back to the value of the yen. Coinbase allegedly "compounded the harm" by restricting many customers' ability to sell the asset and eventually suspending all trading of GYEN without explanation. The proposed class includes hundreds of GYEN purchasers who collectively lost "untold millions in a matter of hours," according to the complaint.

The complaint alleges that though defendants passed off blame to one another for losses that plaintiffs attribute to misrepresentations and omissions, "both contributed to the debacle as both deceived investors regarding the nature of the asset."

Plaintiffs assert causes of action for negligence, negligence per se, negligent misrepresentation, conversion, and violations of New York and California business laws and the Securities Act. The plaintiffs are seeking actual, compensatory and punitive damages, as well as pre- and post-judgment interest, attorney fees, costs and an order blocking GMO Trust and Coinbase from making the alleged misrepresentations.

Key Takeaways

Despite their name, not all cryptocurrencies labeled as stablecoins operate as advertised. It remains to be seen how much courts will see this as an issue of marketing misrepresentations or as the response of a still relatively new and as-yet unregulated financial instrument to currently volatile market conditions. For more on stablecoins, see DWT's Banking and Financial Services publication on stablecoins, here.