This enforcement action is one of the first times a regulator is claiming in court that ETH, one of the largest cryptocurrencies available, is a security, despite the controversial speech by ex-SEC William Hinman saying ETH is not.
New York Attorney General Letitia James has filed a lawsuit against KuCoin for failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange.
Just like it did with CoinEx, the Office of the Attorney General (OAG) was able to buy and sell cryptocurrencies on KuCoin in New York even though the company is not registered in the state. Attorney General James seeks to stop KuCoin from operating in New York and to block access to its website until it complies with the law.
“One by one my office is taking action against cryptocurrency companies”
In addition, the complaint accuses KuCoin of selling unregistered securities in the form of KuCoin Earn, its lending and staking product. New York law requires securities and commodities brokers to register with the state, which KuCoin failed to do.
New York Attorney General James said: “One by one my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk. Today’s action is the latest in our efforts to rein in shadowy cryptocurrency companies and bring order to the industry. All New Yorkers and all companies operating in New York have to follow our state’s laws and regulations. KuCoin operated in New York without registration and that is why we are taking strong action to hold them accountable and protect investors.”
KuCoin claims to be an exchange, but is not registered with the Securities and Exchange Commission as a national securities exchange or appropriately designated by the Commodity Futures Trading Commission as is required under New York Law.
The Office of the Attorney General has previously subpoenaed KuCoin to provide more information about its digital asset trading activities in the state. The firm allegedly failed to do.
KuCoin has already been found to be operating without proper licensure in multiple jurisdictions including the Seychelles, Canada, and the Netherlands.
AG Letitia James’ team regards KuCoin as a broker-dealer, an unregistered one, which is facilitating transactions of securities and commodities without a proper license and registration. And is doing so without being registered in New York.
This lawsuit follows an action against CoinEx for similarly failing to register as a securities and commodities broker. In January, Attorney General James and a multistate coalition recovered $24 million from the cryptocurrency platform Nexo for operating illegally and sued the former CEO of Celsius for defrauding investors and concealing the company’s dire financial condition.
In June 2022, Attorney General James warned New Yorkers of the dangerous risks of investing in cryptocurrencies after the market reached then-record lows. Also in June, Attorney General James reached a nearly $1 million settlement with crypto platform BlockFi Lending LLC for offering unregistered securities. Last March, Attorney General James issued a taxpayer notice to virtual currency investors and their tax advisors to accurately declare and pay taxes on their virtual investments. In October 2021, Attorney General James directed unregistered crypto lending platforms to cease operations for not registering with the state.
New York AG says ETH is a security
This enforcement 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. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.
There has been much debate over whether ETH is a security since June 14, 2018, the day that the U.S. Securities and Exchange Commission’s (SEC) Director of Corporate Finance, William Hinman, announced that the commission would not be treating Ether or Bitcoin as securities.
That announcement created more questions than answers as there are currently over 20,000 coins and tokens trading on exchanges across the globe. The SEC’s lawsuit against Ripple Labs, filed in December 2020, has only heated that debate further, with Hinman taking center stage.
Requests for regulatory clarity, including for Ripple’s XRP, were never properly met by the regulators. The SEC defends itself by saying it is not its mission to provide such clarity, that the Howey test is already clear enough. But as we can see with this new lawsuit against KuCoin, it is not that black and white.