Crypto exchange KuCoin faces lawsuit from US regulators, this time it could set a dangerous precedent for Ethereum

New York District Attorney General (NYDA), Letitia James, submitted lawsuit against a crypto exchange KuCoin.

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

The document did not provide details on which tokens fall under the classification of securities and which are commodities. However, if Ethereum falls under the first category and thus under the jurisdiction of the Securities and Exchange Commission (SEC), its ecosystem and its investors in the US could suffer a blow.

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KuCoin, the latest victim of the crackdown on the cryptocurrency sector

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

The document claims the following:

KuCoin has not registered with the OAG as a securities dealer or commodities dealer as required by Section 23-A of the New York General Business Law (“GBL”), also known as the Martin Act. Such conduct constitutes fraudulent conduct under that law.

The NYDA alleges that KuCoin, which operates as a crypto broker and trading platform, repeatedly engaged in “illegal activities” by acting as an unregistered securities dealer. The lawsuit seeks to ban the crypto exchange from operating in the U.S. and demands a full report on fees received from New Yorkers.

The document adds:

KuCoin has also issued and sold a security called KuCoin Earn, which it sells to investors as a means of earning passive income. KuCoin Earn offers investors passive income through interest or staking rewards after investors allocate their cryptocurrencies to KuCoin Earn.

Is Ethereum a security for New York authorities?

Regarding Ethereum as a security, the paper presents several arguments. First, ETH was launched through an initial coin offering (ICO), and second, its “development and governance is largely driven” by a limited number of individuals, including its creator Vitalik Buterin.

After the ICO, Buterin and the newly formed Ethereum Foundation received “a portion of the funds” raised at these events. The NYDA therefore alleges that Buterin and the foundation financially benefited from the launch of ETH. The document adds:

Buterin and the Ethereum Foundation maintain significant influence on Ethereum and are often the driving force behind major initiatives on the Ethereum blockchain that affect the functionality and price of ETH. Most importantly, Buterin and the Ethereum Foundation played a key role in facilitating the recent major shift in the method of transaction verification from proof-of-work to proof-of-stake (…).

Arguments accusing ETH of acting like a security are based on Buterin and his relationship with the project.

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All content in this article is for informational purposes only and does not in any way serve as investment advice. Investing in cryptocurrencies, commodities and stocks is very risky and can lead to capital losses.