New York Attorney General Alleges Ether Is a Security in KuCoin Lawsuit

New York State Attorney General Letitia James filed suit against KuCoin on Thursday, alleging 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 suit is the first time a regulator has claimed in court that ether is a security. Though Securities and Exchange Commission (SEC) Chairman Gary Gensler has hinted that his agency might consider ether to be a security, the SEC’s sister regulatory agency – the Commodity Futures Trading Commission (CFTC) – has long maintained that both bitcoin and ether are commodity assets.

James’ suit argues that ether is considered a security under the Martin Act – a 102-year-old New York anti-fraud law that gives the Attorney General powers to investigate securities fraud and bring both civil and criminal actions against violators – because the value of ether is dependent on the efforts of others, including co-founder Vitalik Buterin.

According to the lawsuit, the NYAG’s office believes ETH, the luna (LUNA) token and terraUSD (UST) stablecoin, all traded on the exchange, are securities. The price of ETH was down 8% 30 minutes after the suit was revealed, with the broader crypto market similarly plunging.

In a press release the 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 in order to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.”

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

James also argued 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 action brought by the NYAG’s office is not KuCoin’s first brush with regulators. In 2022, South Korean regulators accused KuCoin of conducting “illegal business activities” without proper registration. The Dutch Central Bank made similar allegations in December, claiming 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 direct KuCoin to implement geo-blocking based on IP addresses and GPS locations to prevent access to KuCoin’s apps and services services from New York.

UPDATE (March 9, 2023, 20:55 UTC): Adds additional detail throughout.

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