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 U.S. 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 U.S. 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 (i.e., ‘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 permitting 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 U.S. 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 boost the value of the VERI token while simultaneously engaging in manipulative trades to pump VERI’s value.
Middleton previously sued U.S. 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…
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