New York Attorney General Letitia James today filed a lawsuit against cryptocurrency exchange KuCoin, claiming that the company failed to register as a security and commodities broker-dealer and is falsely representing itself as an exchange.
KuCoin, which is by all accounts a cryptocurrency exchange, is alleged to be allowing users in New York to buy and sell cryptocurrency despite its not being registered in the state to do so. Established in 2017, KuCoin is a legally registered exchange in Seychelles and is based in Hong Kong, neither of which is remotely close to New York.
The lawsuit seeks to stop KuCoin from “operating in New York” — even though it doesn’t — until it complies with New York law. The attorney general believes that any service offering services to New York residents, irrespective of their actual location, should be registered with the state.
“One by one, my office is taking action against cryptocurrency companies that are brazenly disregarding our laws and putting investors at risk,” James said in a statement. “Today’s action is the latest in our efforts to rein in shadowy cryptocurrency companies and bring order to the industry. All New Yorkers and all companies operating in New York have to follow our state’s laws and regulations. KuCoin operated in New York without registration and that is why we are taking strong action to hold them accountable and protect investors.”
While arguably many cryptocurrency exchanges could be described as “shadowy,” KuCoin, at least on paper, isn’t. Shadowy, dubious cryptocurrency exchanges generally don’t openly raise venture capital funding from the likes of U.S. venture capital firms like IDG Capital LLC and Matrix Partners Inc., both of which participated in KuCoin’s last round.
But the lawsuit appears even more odd, as James argues that KuCoin is also acting illegally by offering trading on Ethereum, along with other tokens, including LUNA and TerraUSD, which it claims are securities.
The claim by New York State that ETH is a security would be news to the Securities and Exchange Commission and its chairman, who has said repeatedly said that bitcoin and Ethereum are not securities.
James also claims that KuCoin sold unregistered securities in the form of KuCoin Earn, a lending and staking product. New York law requires securities and commodities brokers to register with the state, which KuCoin failed to do.
The lawsuit seeks a court order for KuCoin to stop representing itself as an exchange online, which it is, to prevent the company from operating in New York, which it isn’t, and for KuCoin to implement geo-blocking based on IP addresses and GPS locations to prevent access to its services from New York. It isn’t necessarily a bad demand but one easily bypassed with a virtual private network.
