New York Attorney General Claims Ether Is Collateral In KuCoin Lawsuit

New York Attorney General Letitia James filed suit against KuCoin on Thursday, alleging that the Seychelles-based crypto exchange is violating securities laws by offering tokens — including ether — that meet the definition of a security without registering with the attorney general’s office.

The case is the first time a regulator has claimed in court that ether is a security. Although Securities and Exchange Commission (SEC) Chairman Gary Gensler has suggested that his agency may consider ether a security, the SEC’s sister regulatory agency – the Commodity Futures Trading Commission (CFTC) – has long argued that both bitcoin and ether are commodity assets. .

James’ lawsuit argues that ether is considered a security under the Martin Act — a 102-year-old New York anti-fraud law that empowers the attorney general to investigate securities fraud and bring both civil and criminal actions against violators — because the value of ether is dependent on the stake to others, including founder Vitalik Buterin.

According to the case itself, the NYAG’s office believes that ETH, luna (LUNA), and terraUSD (UST) are all securities. The price of ETH fell 8% half an hour after the suit was revealed, and the broader crypto market plunged similarly.

In a press release, NYAG’s office said: “The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers to provide profits to the holders of ETH. Because of that, KuCoin was required to register before they sold ETH, LUNA or UST.

KuCoin did not respond to subpoenas filed by the NYAG’s office served by email and in person.

James also claimed that KuCoin sells unregistered securities via KuCoin Earn, its lending and staking product. The attorney general’s office was able to create a KuCoin account using a computer with a New York-based IP address to buy and sell digital tokens, for which KuCoin charged a fee. It was also able to deposit tokens into the KuCoin Earn product for a fee.

The case filed by the NYAG’s office is not KuCoin’s first brush with regulators. In 2022, Korean regulators accused KuCoin of conducting “illegal business activities” without proper registration. The Dutch central bank made similar claims in December last year, claiming that the exchange was operating without a license.

With her lawsuit, Attorney General James is seeking a court order to stop KuCoin from representing itself as an exchange, prevent the company from operating in New York and ask KuCoin to implement geoblocking based on IP addresses and GPS location to prevent access to KuCoin’s apps and services from New York.

UPDATE (March 9, 2023, 20:55 UTC): Adding further details throughout.

UPDATE (9 March 21:05 UTC): Adding ETH price movement.