Ethereum classified as security in KuCoin lawsuit by New York

• KuCoin exchange is being sued for listing unregistered securities without the required registration.

• Ether has been listed within the lawsuit as one of those securities offered by the exchange.

In a bid to accelerate crackdowns in the crypto industry, multiple regulators across different departments have come together to investigate and take action against crypto companies and projects. This coordinated action is dubbed “Operation Choke Point 2.0.” This operation continues with the KuCoin exchange becoming the latest target.

According to reports, New York Attorney General Letitia James has filed a lawsuit against the exchange for failing to register as a securities and commodities broker-dealer. The charge alleges that the company falsely represents itself as an exchange and sells Ethereum which is security. James, therefore, requests that the platform is blocked in New York until it complies with the law.

The 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.

According to a report, the New York state does not want KuCoin to register with them because it does not comply with the BitLicense regulations. These regulations are meant to protect the consumer and prevent money laundering. New York is also said to be going after KuCoin Earn, an income generator for users by staking and lending certain tokens.

However, the likes of Coinbase, Kraken, Bittrex, and Bitfinex have registered with the state of New York. 

The petition classified Ethereum as securities and alleges that it relies on the effort of the developers to create gains for holders.

The petition argues that ETH, just like LUNA and UST, is a speculative asset that relies on the efforts of third-party developers to provide profit to the holders of ETH. Because of that, KuCoin was required to register before selling ETH, LUNA, or UST.

Why some regulators think Ethereum is a security

Ethereum has been under regulators’ scrutiny since moving from the Proof-of-Work to the Proof-of-Stake algorithm. The PoW used by Bitcoin relies on mining to secure the blockchain. The PoS, however, relies on staking. With this, users lock up their assets in exchange for interest. 

In the lawsuit, Attorney James stated that Ethereum is a security because of its early distribution plan and the fact that the whole system is maintained by a small group of contributors. He also argues that the asset is largely controlled by Ethereum’s co-founder, Vitalik Buterin, and the non-profit Ethereum Foundation. Also, the small number of contributors that control the blockchain profit from the network and the surge of the ETH. 

Buterin and the Ethereum Foundation also received significant quantities of ETH in the ICO and are believed to retain significant stakes of that ETH today.

What happens when ETH is classified as security?

Once Ethereum is classified as a security, exchanges would have to register with the US Securities and Exchange Commission to list it for trade. 

Collins Belton, a California-based crypto attorney, and partner at Brookwood PC believe that exchanges would find a huge challenge in dealing with the ruling that Ether is a security. 

He said:

If you’re already registered in New York, you now have a question – do you either delist ether and/or block your New York customers from being able to buy ether or do you just simply register as a broker-dealer?

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This could also be a huge blow to the Commodity Futures Trading Commission (CFTC) which argues that Ether is a commodity and hence falls within its jurisdiction. 

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