KuCoin Lawsuit Could Set Dangerous Precedent For Ethereum

The New York District Attorney General (NYDA), Letitia James, filed a lawsuit against crypto exchange KuCoin. According to a document filed with the Supreme Court of the State of New York against two companies running the trading venue in the U.S., PhoenixFin and Mek Global Limited.

The lawsuit accuses KuCoin of offering unregistered securities and commodities in New York. These digital assets are the former native token of Terra’s collapsed ecosystem, LUNA, its algorithmic stablecoin UST, and Ethereum (ETH), the second crypto by market capitalization.

The document failed to provide details on which tokens fall under the security classification and which are commodities. If Ethereum falls under the former and the jurisdiction of the Securities and Exchange Commission (SEC), its ecosystem and its investors in the U.S. could suffer a blow.

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In addition to allegedly offering unregistered assets in New York, KuCoin facilitated access to financial products, such as KuCoin Earn, to provide investors with yield. This product and actions, the Attorney General argues, are illegal as they were not registered with federal authorities and regulators.

The document claims the following:

KuCoin failed to register with OAG as a securities broker, dealer or commodity broker-dealer as required by Article 23-A of New York General Business Law (“GBL”) also known as the Martin Act. Such conduct is a fraudulent practice under the Martin Act.

For operating as a crypto broker and trading platform, the NYDA believes KuCoin “repeatedly engages” in illegal activities by operating as an unregistered “securities broker or dealer.” The lawsuit aims at banning the crypto exchange from operating in the U.S. and demands a full report on its fees received from New Yorkers.

The document adds:

KuCoin also issued and sold a security called KuCoin Earn, which it markets to investors as a means for earning passive income. KuCoin Earn offers to provide investors with passive income through either interest or staking rewards after investors allocate their cryptocurrencies to KuCoin Earn.

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On Ethereum as a security, the document presents several arguments. First that ETH was launched via an Initial Coin Offering (ICO), second that its “development and management is largely driven” by a reduced number of individuals, including its inventor Vitalik Buterin.

After the ICO, Buterin and the newly created Ethereum Foundation received “a portion of the funding” raised in these events. Thus, the NYDA claims that Buterin and the Foundation financially benefited from launching ETH. The document adds:

Buterin and the Ethereum Foundation retain significant influence over Ethereum and are often a driving force behind major initiatives on the Ethereum blockchain that impact the functionality and price of ETH. Most relevant here, Buterin and the Ethereum Foundation played key roles in facilitating the recent fundamental shift of the transaction verification method from proof-of-work to proof-of-stake (…).

The arguments accusing ETH of operating as a security are based on Buterin and its relationship with the project and the migration to a Proof-of-Stake (PoS) consensus. Legal expert Collins Belton addressed the lawsuit and the NYDA arguments.

The expert believes ETH’s “ultimate boss battle time” is ahead with potential short-term negative implications for the project. Over the long term, however, Ethereum will likely come out on top. Belton explained:

If we see civil action, this might be the best time for the EF and others to get amicus briefs submitted. Long term I feel good about where courts will come out here, because they won’t want to establish a precedent they know will not be respected and will undermine judicial authority. But a slug fest may finally be here. Get ready.