New York Attorney General Letitia James has sued cryptocurrency exchange KuCoin, accusing it of selling commodities and securities on its platform without the required registration. One of the “securities” it accused KuCoin of illegally selling was ether the second-largest cryptocurrency after bitcoin.
KuCoin illegally sold Ether (ETH), Terra (LUNA) and TerraUSD (UST) on its platform, according to a lawsuit filed in New York State Supreme Court. "Tokens are commodities and securities under the Martin Act."
Specifically, the filing claims that the three cryptocurrencies “represent the investment of funds in common businesses whose profits are derived primarily from the efforts of others” — the same criteria used to classify securities under the Howey test. According to James, ethereum's security status is largely related to its relationship with ethereum founder Vitalik Buterin and the ethereum foundation, a non-profit organization dedicated to growing the ethereum ecosystem. The foundation launched an initial coin offering (ICO) in 2014 to fund its operations, with participants selling bitcoin in exchange for a promise of future ether when the network launched in 2015.
It also claims that Ethereum is advertised as an investment directly on the Ethereum Foundation's website, claiming that many users "see it as a digital store of value because, over time, the rate at which new ETH is created decreases." slowing down.” Since the September merger, the creation of new ether has slowed considerably, inspiring many to dub it “ultrasonic money.”
However, according to the NYAG, the upgrade further establishes Ether’s security status. As she explained, Buterin and the Ethereum Foundation are largely responsible for facilitating ethereum’s transition to a proof-of-stake consensus mechanism, and as early and large ether holders, they have benefited greatly from it. “The shift to proof-of-stake significantly impacts the core functionality and incentives of holding ETH, as ETH holders can now profit simply by participating in staking,” the filing reads.
The U.S. Securities and Exchange Commission (SEC) has made various broad statements and hints in the past that ethereum is a security, but Thursday's lawsuit marks the first major allegations to be formally filed.
SEC Chairman Gary Gensler argued last month that “everything but bitcoin” could fall under his agency’s purview. In September, he claimed that ethereum's Merge could make its native cryptocurrency more secure.
Many in the crypto community disagree with the NYAG's allegations. Neeraj K. Agrawal from cryptocurrency policy think tank CoinCentre responded to the news with a series of previously published arguments claiming that “the value of ether and the functioning of the ethereum network are not dependent on the [Ethereum] foundation.” Last month, Coinbase CEO Brian Armstrong shared the argument, claiming that staking does not involve securities transactions. The SEC issued a Wells notice to Paxos in February to issue its BUSD stablecoin, claiming it may also be an unregistered security.
