New York AG is going after the Ethereum blockchain

A lawsuit against a cryptocurrency exchange by the state of New York looks a lot more like a referendum on the world’s second largest blockchain, Ethereum.

Why it’s important: Ether has a market cap of nearly $200 million and approximately 400,000 daily users. Its popularity was partly fueled by the fact that entrepreneurs had been convinced that the coin had been exempted from securities regulations.

Details: New York Attorney General Letitia James announced a lawsuit against crypto exchange KuCoin on Thursday, noting in particular the fact that it is the first lawsuit alleging that ether is a security.

• KuCoin is the fourth largest crypto exchange by volume, according to CoinMarketCap. Founded in 2017, it has $3.1 billion in assets on its platform and has over $700 million in daily volume.
• The complaint found that it violated the law by selling commodities and securities that were not properly registered in New York state, that it offered an investment product similar to the one that got a US-based exchange in trouble with the SEC and that it failed to register as an exchange in the state.

In the weeds: The complaint goes to the trouble of arguing that ether (ETH) is a security under existing law.

• It describes the initial coin offering that funded the development of Ethereum. It then draws attention to the network’s transition to a new consensus mechanism as evidence that a small group retains control over it.
• “The developers of ETH promoted it as an investment contingent on the growth of the Ethereum network,” the complaint states.

• Independent operators who verify the validity of transactions on the blockchain are automatically paid in new ethers issued by the network, securing the ledger against manipulation.

Of the note: To verify that various cryptocurrencies were available in the state on KuCoin, a detective bought and sold digital assets on the platform within its borders.

KuCoin did not immediately respond to a request for comment.

Bottom line: AG seeks ill-gotten gains apology from New Yorkers, injunctive relief and other remedies.

Yes, but: What everyone in the distributed ledger industry will actually be watching is whether the court supports New York’s claim that the second largest cryptocurrency in the world should be regulated as a security.