New York Attorney General Alleges Ethereum is a Security in KuCoin Lawsuit

New York Attorney General Letitia James has filed a lawsuit against cryptocurrency exchange KuCoin for trading commodities and securities on its website without registering them. Ether, the second biggest cryptocurrency after Bitcoin, is one of the “security” it claims KuCoin unlawfully marketed.

According to the case filed with the New York Supreme Court, KuCoin unlawfully traded Ether (ETH), Terra (LUNA), and TerraUSD (UST) on its website. “According to the Martin Act, the Tokens are commodities and securities.”

According to the petition, the three cryptos “represent investments of money in common companies with rewards to be earned principally from the labor of others” – the same criterion used to categorize a security under the Howey Test.

According to James, Ether’s security is mostly determined by its association with Ethereum developer Vitalik Buterin and the Ethereum Foundation, a non-profit committed to the development of the Ethereum ecosystem. To support its activities, the foundation held an Initial Coin Offering (ICO) in 2014, in which members sold their Bitcoin in exchange for promises of future Ether when the network opened in 2015.

It further says that Ether was actively pushed as an investment on the Ethereum Foundation’s website, claiming that many users “view it as a digital store of value because the generation of new ETH slows down over time.” With the September Merge, fresh Ether generation has slowed significantly, prompting many to describe it as “ultrasound money.”

Ethereum Merge the Weak Point

Yet, the NYAG claims that the upgrade solidified Ether’s security status. Buterin and the Ethereum Foundation, she added, were substantially responsible for promoting Ethereum’s transition to a proof of stake consensus mechanism, from which they benefited enormously as early and big 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 previously made broad comments and inferences that Ether is a security, but Thursday’s complaint is the first large collection of accusations to explicitly make the case.

Last month, SEC Chairman Gary Gensler stated that “everything but Bitcoin” certainly fits within his agency’s authority. He stated in September that Ethereum’s Merge had made its native coin more secure.

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.”