New York Attorney General Sues KuCoin, Argues Ethereum and Other Cryptocurrencies are Securities

Prosecutor Letitia James claims that Ethereum, Luna, and TerraUSD are valuable securities and alleges that KuCoin offered, sold, and bought these commodities without the necessary registration.

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New York Attorney General Letitia James formally sued the bitcoin (BTC) and cryptocurrency exchange KuCoin. The complaint is because that entity would have offered, sold and bought securities and commodities without the necessary registration.

As shown in the formal complaint, the prosecutor alleges that ether (ETH), the cryptoasset, native to the Ethereum blockchain, is a valuable security. The same was said of LUNA and TerraUSD, the failed cryptocurrencies that kicked off the bear market in 2022.

According to James, each of these cryptocurrencies falls under the definitions of commodities, covered by the New York state securities law (also known as the Martin Act). There, foreign currencies and any other goods, articles or materials are included.

In turn, it suggests that these tokens are securities, because they “represent investments of money in common enterprises with earnings derived primarily from the efforts of others.”

The prosecutor alleges that Singapore-based cryptocurrency exchange KuCoin, one of the longest-running in the market, “is engaged in the business of selling and offering to sell commodities through accounts, agreements or contracts to New York accounts primarily for investment purposes.”

Three factors that make ETH a security
In her lawsuit, Letitia James went on to explain why she considers ETH to be a valuable security. She determined that there are three factors that give this cryptocurrency that characteristic.

The first is the Initial Coin Offering (ICO) that was made in favor of ETH in its early days. As James explains it, in 2015 the Ethereum Foundation launched the ICO, in which ETH was sold to fund the creation of the organization.

This ICO, James argues, provided direct profits to the developers and creators of the protocol. Prominent among them is Ethereum co-founder Vitalik Buterin, who also reportedly received “significant amounts” of ETH in 2015. “And it is believed that he still retains holdings of those coins today,” he said.

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The second factor determined by the prosecutor has to do with the Merge, an event that occurred in 2022 and involved Ethereum’s migration from the Proof-of-Work consensus protocol to the Proof-of-Participation protocol.

According to the prosecutor, that migration caused the verification of transactions in Ethereum to no longer be given by computational effort, but by a “pooling method that incentivizes users to own and staking ETH.”

“The change to the Proof of Stake significantly affected the core functionality and incentives to own ETH, because coin holders can now profit by simply staking,” James criticized.

The final factor that makes ETH considered a value in the eyes of Letitia James is that this cryptocurrency was touted by its developers as an investment that depended on the growth of the Ethereum network.

“The ICO documents noted that ETH production would be drastically reduced over time, causing ETH to become increasingly scarce and therefore more valuable,” the lawsuit states.

But, according to James, since the Merge “the value proposition has shifted significantly because ETH ownership translates directly into earnings potential by earning participation rewards.”

It’s not just Letitia James who thinks so
The New York attorney general is not alone in considering ETH to have the characteristics of a security. Hints to that effect have been made by U.S. authorities in the past.

As reported by CryptoNews, in February, Securities and Exchange Commission (SEC) Chairman Gary Gensler stated that “anything other than bitcoin” can be regulated by them.

Without directly mentioning any other cryptoasset, the official expressed that “almost all types of cryptocurrency transactions already fall under the SEC’s jurisdiction.”

According to Gensler, the promoters behind cryptocurrency projects behave much like entrepreneurs who profit from the growth of their companies’ stocks. This makes these tokens viewed as valuable securities, from his perspective.

“These tokens are value securities because there is a pool in the middle and the public anticipates gains based on that pool,” Gensler said last month, clearly in line with what the New York prosecutor is now explaining.

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