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New York Attorney General Takes Action Against Crypto Platform KuCoin
Practical Law Legal Update w-038-7704 (Approx. 5 pages)
New York Attorney General Takes Action Against Crypto Platform KuCoin
by Practical Law Finance
| Published on 14 Mar 2023 • USA (National/Federal) |
New York Attorney General (NYAG) Letitia James filed an enforcement action against crypto trading platform KuCoin for failing to register with the Office of the Attorney General of the State of New York (OAG) as a securities or commodities broker-dealer and for falsely representing itself as a crypto exchange despite being unregistered with the SEC and the CFTC. In the KuCoin action, the NYAG has asserted for the first time that the major cryptocurrency Ether is a security.
On March 9, 2023, the NYAG filed a complaint (KuCoin complaint) in the Supreme Court of the State of New York against MEK Global Limited and Phoenixfin PTE LTD d/b/a KuCoin (KuCoin), a cryptocurrency trading platform, for failing to register with the Office of the Attorney General of the State of New York (OAG) as a securities or commodity broker-dealer and for falsely representing itself as a crypto exchange despite being unregistered with the SEC and the CFTC. The KuCoin complaint alleges that KuCoin:
- Violated the New York Martin Act (N.Y. Gen. Bus. Law § 352-c) which requires entities selling securities from New York State or to New York residents to register as securities dealers and/or commodities broker-dealers, by selling on its platform:
- unregistered securities in the form of KuCoin Earn, which is a lending and staking product; and
- virtual currency (VC) that are securities and commodities, including Ether (ETH), LUNA, and TerraUSD (UST).
- Represented itself as an exchange without registering with the SEC as a national securities exchange or being designated by the CFTC as a designated contract market (DCM).
- Failed to comply with a subpoena issued by the OAG in January 2023 to provide testimony regarding crypto-asset securities and commodities trading on its platform.
Although the SEC has previously held that LUNA and UST are securities (see Legal Update, SEC Charges Terraform and Its CEO with Securities Fraud in Connection with Terra USD (UST) Stablecoin and Other Crypto Assets), this is the first time a state regulator classified ETH as a security. The NYAG claims that ETH is similar to LUNA and UST in that it is a speculative asset that relies on the efforts of third-party developers in order to provide profit to the holders of ETH.
The NYAG offered as support for its argument ETH's shift in 2022 from a proof-of-work validation mechanism, in which validators compete to answer complex mathematical problems to earn tokens, to proof-of-stake validation, in which validators are rewarded a proportional fraction of tokens locked into a staking pool in exchange for validating entries into a distributed database. The NYAG claims this move:
- Demonstrates the significant influence the Ethereum Foundation and Vitalik Buterin, a co-founder and inventor of ETH, wield over ETH's blockchain and the price of ETH.
- Makes the validation process non-competitive.
- Creates a mechanism through which participants receive profits from the efforts of others.
The NYAG is seeking permanent injunctive relief from KuCoin in the form of:
- An accounting of all fees from New York investors.
- A permanent injunction banning KuCoin from selling and buying securities and commodities to and from New Yorkers.
- Restitution and disgorgement.
- $2,000 in costs.
Other NYAG Crypto Actions
The NYAG and OAG have taken a number of actions against cryptocurrency trading platforms and token issuers recently. For details, see Legal Updates: