New York AG sues to block KuCoin crypto trading platform, argues ETH is both security and commodity

By Lene Powell, J.D.

New York Attorney General Letitia James has filed an enforcement action in New York state court seeking to stop cryptocurrency trading platform KuCoin from operating in New York. The action charges KuCoin with failing to register as a securities and commodities broker-dealer and falsely representing itself as an exchange (People of the State of New York v. Mek Global Limited d/b/a KuCoin, March 9, 2023).

“KuCoin operated in New York without registration and that is why we are taking strong action to hold them accountable and protect investors,” said James.

Alleged violations. According to the complaint, KuCoin is a cryptocurrency trading platform that operates through www.kucoin.com and mobile phone applications. KuCoin was founded in September 2017 and is headquartered in the Republic of Seychelles. It is owned and operated by Mek Global Limited, based in the Republic of Seychelles, and PhoenixFin PTE Ltd., based in Singapore.

The Office of the Attorney General (OAG) alleges that KuCoin violated the law in at least three ways:

• KuCoin sold, offered to sell, purchased and offered to purchase cryptocurrencies that are commodities and securities without being registered with OAG as a commodity broker-dealer or a securities broker or dealer, in violation of New York law.
• KuCoin issued and sold “KuCoin Earn,” a security in which KuCoin pooled investors’ cryptocurrencies to generate income for both itself and investors. KuCoin issued and sold this product to New Yorkers without registering as a securities broker or dealer.
• KuCoin wrongfully represented itself as an “exchange” without appropriate registration or designation in violation of New York law.

According to OAG, KuCoin also failed to comply with a subpoena issued by OAG to provide more information about its digital asset trading activities in the state. KuCoin has already been found to be operating without proper licensure in several jurisdictions including the Seychelles, Canada, and the Netherlands.

OAG alleges that KuCoin violated New York Executive Law (“Executive Law”) § 63(12) and the New York General Business Law (“GBL”) (“the Martin Act”) §§ 352-c(3), 359-e (2), 359-e(3) and 359- e(14)(b, j, and l).

ETH and other tokens are securities … AND commodities? Significantly, OAG argues that ETH, the native cryptocurrency on the Ethereum blockchain and one of the largest cryptocurrencies, is both a commodity and a security.

OAG says the action is one of the first times a regulator is claiming in court that ETH is a security.

OAG also alleges that KuCoin’s own token, KuCoin Earn, is a security. Further, OAG argues that LUNA and its sister token, UST, are commodities and securities. LUNA and UST are virtual assets created by Terraform Labs as an “algorithmic stablecoin” project.

Penalties and undertakings sought. The OAG seeks a court order to stop KuCoin from misrepresenting that it is an exchange, prevents the company from operating in New York, and directs KuCoin to implement geo-blocking based on IP addresses and GPS location to prevent access to KuCoin’s mobile app, website, and services from New York.

OAG also seeks an accounting of fees received, restitution and disgorgement, and costs.

Other NY AG crypto actions. OAG noted previous actions to enforce New York laws in the cryptocurrency industry and protect New York investors, including actions against crypto platforms CoinEx, Nexo, Celsius, and BlockFi Lending.

“One by one my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk,” said James.

The case number for People of the State of New York v. Mek Global Limited d/b/a KuCoin was unavailable at time of publication.