- The NYAG has labelled Ethereum (ETH), along with two other coins, as a security.
- The New York AG wants to stop Kucoin’s operations in the region via the lawsuit
The New York Attorney General Letitia James has sued the crypto exchange – Kucoin. The AG alleges that Kucoin violated three aspects of the Martin Act. The first being the offering and purchase of unregistered commodities and securities. AG James claims Ethereum is a security.
The lawsuit stated,
“Petitioner seeks a permanent injunction to end the ongoing illegal activities of Mek Global Limited and Phoenixfin PTE Ltd., both doing business as KuCoin (hereinafter collectively referred to as “KuCoin”) (…) in violation of General Business Law (“GBL”) § 352 et seq. (the “Martin Act”) and Executive Law”
The NYAG also alleges that the crypto exchange violated securities law through its Kucoin Earn – a lending and staking service. Kucoin was also accused of failing to register with the SEC/CFTC. Furthermore, even though the OAG issued a subpoena to the exchange, it failed to disclose information regarding its activities in state.
Kucoin is asked by the attorney general to stop operating in New York and block its website until it conforms to the law. The press release explains the situation.
“a court order that stops KuCoin from misrepresenting that it is an exchange, prevents the company from operating in New York, and directs KuCoin to implement geo-blocking based on IP addresses and GPS location to prevent access to KuCoin’s mobile app, website, and services from New York.”
The case against Ethereum
AG James, who is defending the crypto exchange, also labels Ethereum (ETH), Terra LUNA (LUNA), and UST as securities. They were classified as securities by the AG using the Howey Test. The NYAG proved that the coins met all four criteria. According to the press release,
“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. 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.”
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The four prongs are determining whether it is an investment of money, in a common enterprise, an expectation of profit, and profit derived from the other’s efforts.
According to the attorney general, the coins met the first criterion because people had invested money in ETH, LUNA and UST. For the second criterion, the NYAG claimed that coins were in “common enterprise with each cryptocurrency’s management team.” AG James claims that the “fortune of the token holder” is connected to the management’s wealth. This was due tokens reserved only for creators, developers, and management teams. The lawsuit explained that the third and fourth criteria were described in the following:
“ETH, LUNA, and UST’s management teams promoted their respective cryptocurrencies as profit opportunities that were contingent on the growth of their respective networks, which would occur in substantial part because of work performed by its founders, developers, and managers.”