The New York Attorney General’s office today filed a lawsuit against cryptocurrency exchange KuCoin for allegedly violating securities and commodities laws in the state. In the complaint, Attorney General Letitia James makes the startling claim that not only are Terra (LUNA) and TerraUSD (UST) securities, as previously alleged by the United States Securities and Exchange Commission, but also Ethereum (ETH), the second-largest cryptocurrency by market capitalization.
KuCoin facilitates trading of ETH, James added, “a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH.” The exchange should have registered before offering ETH, LUNA and TerraUSD — all of which fall under the securities classification, according to James.
However, the NYAG may not have the final say on the issue. Rostin Behnam of the CFTC told the Senate Agriculture Committee as recently as Wednesday that ETH is in fact a commodity, not a security. “We would not have allowed the Ether futures product to be listed on a CFTC exchange if we did not feel strongly that it was a commodity asset,” he explained.
SEC leaders have made similar statements. In 2018, William Hinman, the then-Director of Corporate Finance at the SEC, said in a speech that both bitcoin and ETH are not securities. His justification was that bitcoin is “decentralized” and ETH, despite its 2014 initial coin offering, had become “sufficiently decentralized” over the past four years to make it a non-security.
The US regulators have the authority to sue crypto exchanges if they believe they have violated securities laws. This often occurs by selling securities and commodities without proper registration. Of late, the same regulator sued CoinEx for violating regulations.
The two main regulatory bodies are the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). They are responsible for trading securities and commodities in the US. Under US law, any entity that wants to sell securities or commodities must register with the appropriate regulatory body. Also, follow specific rules and regulations. Failure to do so can result in legal action by the regulatory authorities.
Crypto exchanges that offer trading in securities or commodities may be subject to these rules and regulations, depending on the specific nature of the traded assets. For example, if a crypto asset is deemed a security, the exchange that trades that asset must register with the SEC. Overall, the SEC and the CFTC have been more active in regulating the crypto industry in recent years. They have issued warnings and taken legal action against companies and individuals they believe have violated securities laws or engaged in fraudulent behavior.
The lawsuit also cited the initial coin offering (ICO) conducted by the Ethereum Foundation as evidence of a securities offering. Similar to the capital formation purpose of security offerings in the U.S., the documents from the ICO describe it “as a means of promoting the development of the Ethereum blockchain by paying expenses incurred by developers, paying for legal contingencies, research, and further development.