even if it's not a security, a stablecoin can trigger false advertising claims

Donovan v. GMO-Z.com Trust Company, Inc., --- F.Supp.3d ----, 2025 WL 522503, No. 23 Civ. 8431 (AT) (S.D.N.Y. Feb. 17, 2025)

Plaintiffs sued GMO Trust, alleging that it violated federal securities laws and NY state consumer protection laws in connection with the “offer” of a digital asset known as “GYEN,” sold as a “stablecoin.” The court found that GYEN wasn’t a security, but allowed the NY and California claims to proceed.  (Claims against Coinbase have been sent to arbitration.)

GMO Trust touted GYEN as a fiat-collateralized stablecoin—that is, one unit of the stablecoin is backed by one unit of fiat currency, here the Japanese yen. GMO Trust retains for itself any interest generated by the bank accounts where it deposits customer collateral, and it may receive monetary benefits from third-party exchanges as consideration for agreeing to list GYEN on their platforms.

Its Whitepaper on its website touted GYEN as “a global currency solution” that can “virtually eliminate [the] volatility” associated with traditional digital assets such as Bitcoin “while still benefitting from the advantages of digital assets, such as high transaction speeds matched with low costs.” GMO Trust advertised and linked to various “partner” exchanges, including Binance and Coinbase. It allegedly consistently maintained in its promotional materials that purchasers could “always redeem 1 GYEN for 1 JPY ... directly with GMO Trust” and on any third-party exchanges that listed the digital asset.

GYEN launched in March 2021, and there was a lot of price movement. Plaintiffs bought at elevated prices and lost 90% or even 99% of their purchase prices as the price of GYEN returned to its yen peg. For example, “GYEN purchasers whose orders on Binance took time to fill, or who mistakenly bought GYEN when the price on Binance was untethered from the value of JPY, lost as much as 99 percent of their purchase value within hours.” Some of this occurred when exchanges were restricting the ability of customers to trade GYEN in order to deal with rapid fluctuations.

Whether GYEN was a “security” is outside my wheelhouse, so I’ll just report the court’s top-line conclusion: no (specific to the stablecoin context).

However, it was reasonably likely that there would still be CAFA jurisdiction over the state law claims, to which the court turned:

Plaintiffs allege that GMO Trust targeted consumers with statements and advertisements representing that GYEN would always remain pegged to the value of a historically stable fiat currency; omitted the risk that the asset’s value could become untethered from JPY on certain of GMO Trust’s “partner” platforms; and continued to make such representations and omissions even after the price of GYEN on Binance temporarily untethered from the value of JPY in May 2021. Indeed, Plaintiffs allege that GMO Trust not only omitted the risk that the price of GYEN could become untethered on third-party platforms, but it affirmatively stated that consumers would “always” be able to purchase GYEN at a one-to-one value with JPY on GMO Trust’s “partner” exchanges.

They also sufficiently alleged that these statements were objectively misleading, deceptive, and false because the value of GYEN in fact could—and allegedly did—become untethered from the value of JPY on third-party exchanges, and fluctuated over 200% against the dollar in one period. “Given that GMO Trust held GYEN out to consumers as a ‘stable’ counterweight to the extreme volatility of the digital asset market, and held itself out as a regulated and licensed entity offering a product backed by fiat currency held in FDIC-insured U.S. bank accounts and monitored by independent auditors, a reasonable consumer, acting reasonably in the circumstances, could have been misled or deceived by GMO Trust’s statements, acts, practices, omissions, and advertisements.”

As to California law, the court declined to require plaintiffs to meet Rule 9(b)’s heightened pleading standard, because the UCL’s “fraud” prong is not the same as common law fraud—it has lower standards. Unfairness claims also survived.