NEW Attorney General Says Ether Is Collateral in KuCoin Suit
(Bloomberg) — New York Attorney General Letitia James is taking another swing at the digital asset industry with a lawsuit against KuCoin, one of the largest and most popular crypto exchanges.
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James claims that KuCoin cannot legitimately claim to be an exchange because it is not registered with the US Securities and Exchange Commission or properly designated by the Commodity Futures Trading Commission as required under New York law. “Today’s action is the latest in our efforts to rein in shady cryptocurrency companies and bring order to the industry,” James said in a statement.
James said the case is among the first in which a government regulator has argued in court that Ether, the second largest crypto token by value, is a security. “One by one, my office is taking action against cryptocurrency companies that brazenly ignore our laws and put investors at risk,” James said.
The question of which cryptoassets regulators consider to be securities – and thus subject to applicable rules and laws and the jurisdiction of the SEC – is being questioned on several fronts and is the subject of active litigation.
“SEC cases against Ripple, LBRY and former Coinbase employee Ishan Wahi will be critical in clarifying what types of digital asset transactions are considered securities,” Bloomberg Intelligence analyst Elliott Stein wrote in a note Wednesday, ahead of the KuCoin lawsuit.
“The SEC’s case against Genesis and Gemini will likely find that their Earn loan program is a security. We believe Coinbase’s betting program is vulnerable to an SEC action, as Kraken was. The SEC’s Terraform complaint previews actions against stablecoins, while a Dapper Labs ‘Top Shot Moments’ case shows how NFTs can be securities,” Stein added.
KuCoin, based in the island nation of Seychelles, failed to register as a securities and commodities broker in New York and represents itself as an exchange, according to the lawsuit filed Thursday in state court.
The case comes two weeks after James filed an almost identical complaint against crypto platform CoinEx. Another case against crypto companies Nexo Inc. and Nexo Capital Inc. resulted in a settlement in January of up to $24 million for New York and nine other states.
“One by one, my office is taking action against cryptocurrency companies that brazenly ignore our laws and put investors at risk,” James said in a statement. “Today’s action is the latest in our efforts to rein in shady cryptocurrency companies and bring order to the industry.”
KuCoin’s lawyers could not immediately be identified. Johnny Lyu, CEO of KuCoin, did not immediately respond to a message seeking comment.
State and federal regulators, including the US Securities and Exchange Commission, have increasingly scrutinized crypto companies following the collapse of FTX’s trading platform and the resulting industry meltdown. Just this week, crypto-friendly lender Silvergate Capital Corp. that it plans to liquidate after the turmoil sapped its financial strength.
Former crypto suits
James last year sued the former Celsius Network Ltd. CEO Alex Mashinsky for allegedly defrauding investors out of billions of dollars by lying about the security of his once high-flying crypto lender. New York also received $1 million in a settlement with BlockFi Lending LLC over its offering of unregistered securities — part of a larger settlement with the SEC and state regulators totaling $100 million.
KuCoin was the fourth-largest spot crypto exchange, with more than $500 million in digital assets changing hands in a 24-hour period beginning Wednesday, according to data compiled by CoinMarketCap.com. It is also the fourth largest derivatives exchange, with $1.7 billion in trading volume during the same period, the data show.
James has taken an increasingly aggressive stance on the industry since at least 2021, when she won a court order shutting down virtual currency trading platform Coinseed for defrauding investors out of millions of dollars across the US, and struck a deal requiring Bitfinex and Tether to cease trading in the state to overestimate its reserves and hide almost 850 million dollars in global losses. That same year, James issued two consumer warnings about what she described as “extreme risks” in investing in cryptocurrencies and urged “extreme caution” when doing so.
The Ontario Securities Commission secured a multimillion judgment against KuCoin’s operators in June 2022 for operating without a license. In December, the Dutch central bank issued a warning to investors about the stock market.
–With assistance from Dave Liedtka.
(Redrafts at top to add details on status of litigation on which cryptoassets are securities)
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