The NYAG sued KuCoin last week under state law, alleging that ether, post-Merge, is a security under the Ethereum blockchain’s proof-of-stake consensus mechanism. The NYAG also alleged that terraUSD (UST) and luna (LUNA) are securities, as well as KuCoin’s Earn platform. I’m not going to get into the last two – regulators have alleged for a while now that “earn” products are securities, and have settlements with various lenders to support that contention, and there are other cases looking at the terraUSD/luna ecosystem.
And not to pull a bait-and-switch on you but I have no answer to the question asked in the heading to this section. However, I did want to figure out what the result from the New York Attorney General’s suit against KuCoin could be.
Matthew Blaine, a New Jersey-based partner at the Davison, Eastman, Muñoz, Paone law firm, doesn’t think there will be much of a result and said in a phone call that the case is likely to end in adjudication.
He compared the NYAG suit against KuCoin to the U.S. Securities and Exchange Commission’s (SEC) suit against former Coinbase director Ishaan Wahi. In that suit, the SEC alleged that a number of tokens were securities but did not sue Coinbase for listing the tokens, or the token issuers themselves.
Similarly, KuCoin hasn’t sued the Ethereum Foundation, just the one exchange, Blaine said.
It’s also unclear whether the NYAG is seeking registration from these other types of entities, or indeed from other crypto exchanges operating under the New York Department of Financial Services’ BitLicense.
The NYAG did not return multiple requests for comment, including a question as to whether it would require licensed crypto exchanges to register as securities trading platforms as well.
NYDFS is, of course, the state banking and financial services regulator overseeing all crypto companies, but the regulator’s authority may be challenged by the lawsuit.
One former NYDFS official told CoinDesk that the New York Attorney General’s office and the bank regulator did not have good relations while they were at the agency, describing those relations as a “perennial power struggle.”
The other factor is, of course, the SEC. SEC Chair Gary Gensler is on the record (a few times now) as saying he believes proof-of-stake cryptocurrencies resemble securities. The NYAG suit against KuCoin may not lead to much precedent for the SEC, but it’s still yet another sign regulators are starting to nail down what they’re thinking.
At least one judge, however, has very little patience with how the SEC is currently approaching these questions of whether or not something is a security. Judge Michael Wiles, of the New York Southern District Bankruptcy Court, wrote a pretty scathing order explaining his approval of Voyager Digital’s restructuring plan to sell itself to Binance.US, saying the regulator was not providing any clarity for industry operators.
Repeating his oral order from March 7, the judge went on to say the SEC’s arguments were vague and that the regulator did not provide any evidence backing up its arguments that Binance.US may be operating an unregistered securities exchange or that the VGX token might be a security.
For further reading, I recommend my colleagues Sam Kessler and Cheyenne Ligon’s article asking what it means if ether really is deemed to be a security.
