NYAG Labels Ether as a Security in KuCoin Lawsuit

New York State Attorney General Letitia James filed suit against KuCoin on Thursday, alleging that the cryptocurrency exchange has been operating in the state without registering as a securities and commodities broker-dealer.

Is Ether a Security?

Further, it is the first regulatory lawsuit that claims Ether to be a security. The labeling of Ether as a security was based on the Martin Act, a 102-year-old anti-fraud law, as the cryptocurrency's market value depends on the actions of others, including its Co-Founder, Vitalik Buterin.

Apart from Ether, the lawsuit classified LUNA and TerraUSD stablecoin as securities.

"The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST," the official press release stated.

Though the classification of many cryptocurrencies as securities are in question, the US Commodity Futures Trading Commission (CFTC) has maintained its position that Bitcoin and Ether are commodity assets. However, the Chairman of the Securities and Exchange Commission (SEC), Gary Gensler recently hinted at the agency's position to consider Ether as a security.

Charges against KuCoin

Additionally, James' lawsuit alleged that KuCoin falsely represents itself as an exchange. KuCoin operates from Seychelles and is not registered with the SEC or the CFTC in the United States.

In addition, it blamed the crypto company for offering unregistered securities in the form of KuCoin Earn, which was its lending and staking product.

The case against KuCoin was built by the New York attorney general's office with its first-hand experience on the crypto platform. James' office created a KuCoin account using a computer with a New York IP address and then bought and sold digital tokens, for which the platform charged a fee. Moreover, the prosecutors successfully deposited cryptocurrencies on the KuCoin Earn product, and the platform changed the fees for that.

Before the lawsuit, the NYAG served a subpoena to KuCoin via email and in person. However, the crypto platform did not respond to that.

Through the lawsuit, the NYAG seeks to stop KuCoin from operating in New York and order it to implement geo-location blocking based on its IP address and GPS across all its platforms.

"One by one, my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk," James said. "Today's action is the latest in our efforts to rein in shadowy cryptocurrency companies and bring order to the industry. All New Yorkers and all companies operating in New York have to follow our state's laws and regulations. KuCoin operated in New York without registration, and that is why we are taking strong action to hold them accountable and protect investors."

Meanwhile, KuCoin has been facing regulatory backlash in many jurisdictions. The platform was banned by Canada's Ontario state regulator and was also listed by South Korea's Financial Intelligence Unit among the illegal crypto exchanges in the country. Furthermore, the latest lawsuit pointed out that the authorities in Seychelles and the Netherlands found KuCoin operating without a proper license.