New York Attorney General Letitia James has sued cryptocurrency exchange KuCoin for selling commodities and securities on its platform without the necessary registration.
One of the “securities” KuCoin alleges to have sold illegally is Ether, the second-largest cryptocurrency after Bitcoin.
Ethereum is a security, says NYAG
for him lawsuit filed with the New York State Supreme Court, KuCoin illegally sold Ether (ETH), Terra (LUNA), and TerraUSD (UST) on its platform. “Tokens are commodities and securities under the Martin Act.”
Specifically, the filing states that the three cryptocurrencies “represent investments of money in common ventures with gains 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 with the creator of Ethereum. Vitalik Buterin and the Ethereum Foundation, a non-profit organization dedicated to the development of the Ethereum ecosystem. The foundation launched an Initial Coin Offering (ICO) in 2014 to fund its operations, whereby participants sold their Bitcoin in exchange for promises of Ether futures when the network launched in 2015.
It also alleges that Ether was promoted as an investment directly on the Ethereum Foundation website, through claims that many users “view it as a digital store of value because the creation of new ETH slows down over time.” Since the merger in September, the new Ether creation has slowed down dramatically, inspiring many to refer to it as “ultrasound money”.
the merger fails
However, according to NYAG, that same update further established the security status of Ether. 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 benefited as early and large holders of Ether.
“The switch to proof-of-stake significantly impacted core functionality and incentives to own ETH, because ETH holders can now benefit from simply participating in the stake,” the filing reads.
The Securities and Exchange Commission (SEC) has made several sweeping statements and hints in the past to suggest that Ether is a security, but Thursday’s lawsuit marks the first major set of charges to formally file the case.
SEC Chairman Gary Gensler argument last month that “everything that isn’t Bitcoin” probably falls under the jurisdiction of his agency. In September, he reclaimed that the Ethereum merger may have made its native cryptocurrency more secure.
Many in the crypto community disagree with the NYAG’s allegations. Neeraj K. Agrawal of the CoinCentre crypto policy think tank answered to the news with a previously published set of arguments on the matter, stating that “the value of ether and the functionality of the Ethereum network do not depend on the (Ethereum) Foundation.”
Last month, Coinbase CEO Brian Armstrong shared arguments claiming that the bet 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.
Featured image courtesy of NBC News.
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