Will Ethereum be banned? What the KuCoin lawsuit could mean for ETH now

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New York State Attorney General (NYDA) Letitia James has filed a lawsuit against crypto exchange KuCoin. According to documents filed with the Supreme Court of the State of New York, the lawsuit is directed against two companies that operate the portal in the United States: PhoenixFin and Mek Global Limited.

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The lawsuit alleges that KuCoin offers unregistered securities and commodities in New York. These digital assets are the former native token of Terra’s fallen ecosystem, LUNA, its algorithmic stablecoin UST – and Ethereum (ETH), the second largest cryptocurrency by market cap!

[DB] South Kucoin Crypto Exchange in New York Industry Crackdown: BBG
— db (@tier10k) March 9, 2023

The document contains no information on which signals fall under the security classification and which are commodities. If Ethereum were to fall under the former and fall under the jurisdiction of the Securities and Exchange Commission (SEC), its ecosystem and therefore all investors could be hindered.

KuCoin, Latest Crypto Raid Victim

In addition to the alleged offering of unregistered assets in New York, KuCoin facilitated access to financial products such as KuCoin Earn to offer investors a return. The attorney general argues that these products and actions are illegal because they are not registered with federal agencies and regulators.

The document claims the following:

“KuCoin has failed to register with the OAG as a securities broker, dealer or commodity broker-dealer as required by Section 23-A of the New York General Business Law (“GBL”), also known as the Martin Act. Such conduct is a fraudulent practice within the meaning of the Martin Act.”

Regarding operations as a crypto broker and trading platform, the NYDA believes that KuCoin has “repeatedly” engaged in illegal activity because it operates as an unregistered “broker or securities dealer”. The lawsuit aims to ban the crypto exchange from operating in the United States, demanding a full report on the fees received.

The document adds:

“KuCoin has also issued and sold a security called KuCoin Earn, which it markets to investors as a means of earning passive income. KuCoin Earn provides passive income to investors in the form of interest or stake rewards after investors allocate their cryptocurrencies to KuCoin Earn.”

Is Ethereum an Illegal Security?

The document makes several arguments about whether Ethereum is a security. 1.: that ETH was launched through an Initial Coin Offering (ICO). 2nd: that its “development and management is largely driven by a limited number of people, including its inventor Vitalik Buterin”.

After the ICO, Vitalik Buterin and the newly established Ethereum Foundation received “part of the money collected at these events”. So the NYDA claims that Buterin and the Foundation benefited financially from the launch of ETH. In the document further:

“Buterin and the Ethereum Foundation have a significant impact on Ethereum and are often the driving force behind major initiatives on the Ethereum blockchain that affect the functionality and price of ETH. Buterin and the Ethereum Foundation played a key role in the recent sea change in transaction verification methodology from proof-of-work to proof-of-work (…).”

The arguments that accuse the smart contract platform of working as security are based on Buterin and his relationship with the project and the transition to Proof-of-Stake (PoS) consensus. But is there something to it? Legal expert Collins Belton has discussed and commented on the NYDA’s law and arguments.

The expert believes that ETH’s “final boss fight time” is about to happen – with corresponding negative effects for the project. In the long term, however, Ethereum could emerge as the winner. Belton explains:

“If there is a civil suit involved, this may be the best time for EF and others to file an amicus brief. In the long term I have a good feeling about the courts because they will not want to set a precedent which they know will not be respected and which will undermine judicial authority. But maybe there will be a fight after all. Prepare.”

TL;DR – NYAG claiming that eth is a security because of the ICO, a small number of developers were driving most of the core development, and proof of stake changed the incentive and profit expectations of the holders. The final boss battle time is approaching. https://t.co/LpSH05RREy
—Collins Belton (@collins_belton) March 9, 2023