NYAG Alleges Ethereum is a Security in Lawsuit Against KuCoin

Andrew Throuvalas
3 min readMar 9, 2023

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The first major lawsuit calling out Ether as a security has been filed with New York’s Supreme Court.

New York Attorney General Letitia James has sued cryptocurrency exchange KuCoin for selling both commodities and securities on its platform without necessary registration.

One of the “securities” it alleges KuCoin to have illegally sold is Ether — the second largest cryptocurrency next to Bitcoin.

Ethereum is a Security, Says NYAG

Per the lawsuit filed with the Supreme Court of the State of New York, KuCoin illegally sold Ether (ETH), Terra (LUNA), and TerraUSD (UST) on its platform. “The Tokens are commodities and securities under the Martin Act.”

Specifically, the filing claims that the three cryptos “represent investments of money in common enterprises with profits to be derived primarily from the efforts of others” — the same criteria for classifying a security under the Howey Test.

James argued that Ether’s security status is largely related to its relationship to Ethereum creator Vitalik Buterin and the Ethereum Foundation, a non-profit dedicated to developing the Ethereum ecosystem. The foundation launched an Initial Coin Offering (ICO) in 2014 to fund its operations, whereby participants sold their Bitcoin in return for promises of future Ether when the network launched in 2015.

It also alleges that Ether was promoted as an investment directly on the Ethereum Foundation’s website, through claims that many users “see it as a digital store of value because the creation of new ETH slows down over time.” Since the Merge in September, new Ether creation has slowed down dramatically, inspiring many to refer to it as “ultrasound money.”

The Merge Backfires

Yet according to the NYAG, that very upgrade further established Ether’s security status. As she explained, Buterin and the Ethereum Foundation were largely responsible for facilitating Ethereum’s move to a proof of stake consensus mechanism, from which they greatly benefitted as early and large Ether holders.

“The shift to proof-of-stake significantly impacted the core functionality and incentives for owning ETH, because ETH holders now can profit merely by participating in staking,” read the filing.

The Securities and Exchange Commission (SEC) has made various broad statements and insinuations in the past to suggest that Ether is a security, but Thursday’s lawsuit marks the first major set of charges to formally make the case.

SEC chairman Gary Gensler argued last month that “everything other than Bitcoin,” likely falls under his agency’s jurisdiction. In September, he claimed that Ethereum’s Merge may have made its native cryptocurrency more security-like.

Many in the crypto community aren’t on board with the NYAG’s allegations. Neeraj K. Agrawal from crypto policy think tank CoinCentre responded to the news with a priorly published set of arguments on the matter — claiming that “the value of ether and the functionality of the Ethereum network is not reliant on the [Ethereum] Foundation.”

Last month, Coinbase CEO Brian Armstrong shared arguments claiming that staking does not involve securities transactions.

The SEC filed a Wells notice against Paxos in February for issuing its BUSD stablecoin, which it alleges may also be an unregistered security.

Originally published at https://cryptopotato.com on March 9, 2023.

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