New York Attorney General Sues KuCoin, Claims Ethereum Is a Security

By Guillermo Jimenez and Mat Di Salvo

The New York Attorney General's office today filed a lawsuit against cryptocurrency exchange KuCoin for allegedly violating securities and commodities laws in the state.

In the complaint, Attorney General Letitia James makes the startling claim that not only are Terra (LUNA) and TerraUSD (UST) securities, as previously alleged by the United States Securities and Exchange Commission, but also Ethereum (ETH), the second-largest cryptocurrency by market capitalization.

“This action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security,” today’s announcement read. “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.”

The NYAG's lawsuit targets KuCoin for allegedly “falsely representing itself as an exchange” when really it is a “securities and commodities broker-dealer.” It aims to block access to the exchange in New York by forcing KuCoin to geo-fence its website based on IP addresses and GPS location.

The Seychelles-based exchange ranks fifth on CoinGecko's list of crypto exchanges based on "trust score" and 17th in the world based on 24-hour trading volume. KuCoin allows users to buy and sell cryptocurrencies like Bitcoin and Ethereum from virtually anywhere in the world, including the United States. The company once touted itself as “the most advanced and secure cryptocurrency exchange," before suffering a $150 million hack in 2020.

The lawsuit argues that ETH is a security because, among other reasons, users can now earn financial rewards by holding the cryptocurrency. “Since transitioning to the proof-of-stake consensus, possession of ETH translates directly to profit potential by earning staking rewards,” reads the lawsuit.

Ethereum last year became a proof-of-stake blockchain. This is a consensus mechanism which requires users to stake or “lock-up” its native cryptocurrency, ETH, to keep the network running. And the more ETH a user stakes, the more rewards they can potentially earn. 

The timing of the lawsuit is also notable, given the attention that staking services have received lately from regulators. Just last month, the SEC fined popular American exchange Kraken $30 million because its staking product allegedly violated securities laws. And SEC Chairman Gary Gensler has hinted that Ethereum may be on the Commission's radar, repeatedly making public statements that suggest Bitcoin is the only crypto asset the SEC believes is a non-security.

Attorney General Letitia James’s move is the latest in a tough crackdown by U.S. authorities on the crypto industry.

The SEC has ramped up enforcement actions of late, and politicians and lawmakers have turned up the anti-crypto rhetoric following the dramatic collapse of the once-dominant FTX crypto exchange and the arrest of its founder Sam Bankman-Fried.

The state of New York, which has some of the strictest laws in the country regarding crypto, last month filed a lawsuit against crypto exchange CoinEx for also failing to register itself as a securities and commodities broker-dealer. 

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