Paradigm Files Amicus Brief in NY AG's Case Against KuCoin Pushing Back Against Allegation that ETH is a Security

May 18, 2023 | Rodrigo Seira

TLDR: Paradigm filed an amicus brief in the lawsuit that the NY AG (the “OAG”) brought against KuCoin, in which the OAG alleged that certain tokens traded by KuCoin, including ETH, are securities.

Our brief highlights the unfairness of the OAG’s tactics, which deprive the most affected parties an opportunity to defend themselves in court. Unless courts put a stop to it, this tactic risks becoming a hallmark of crypto regulation in the US. Our hope is this court will see through the government’s attempt to circumvent due process and avoid making any determination about the security status of ETH.

To support the claim that KuCoin violated NY securities laws by failing to register as a securities broker or dealer, the OAG alleged in its Petition that various tokens sold and purchased by KuCoin, including ETH, are securities.

ETH has been circulating publicly since 2014, and there has never been any prior finding that ETH is a security. Yet the OAG is trying the due process side door: alleging that the world’s second most valuable token is a security in an action against an unrelated third party who is unlikely to argue otherwise.

The OAG’s allegations about ETH directly contradict the statements of many regulators:

  • The former director of the SEC’s Division of Corporation Finance asserted in a speech that ETH was not a security.
  • Former SEC Chairman Jay Clayton approvingly cited that speech multiple times.
  • Even current SEC Chair Gary Gensler, who recently opined that the “vast majority” of tokens are securities, previously stated that ETH could be “off the hook.”
  • The CFTC has stated several times that ETH is a commodity.
  • New York’s Department of Financial Services (“DFS”) placed ETH on its “Greenlist” of tokens that can be transacted by entities that possess a “Bitlicense,” but are not necessarily securities intermediaries, thus demonstrating that DFS believes that ETH is not a security.

Finally, the legal analysis underpinning the OAG’s allegations about ETH is deeply flawed. The OAG conflates ETH tokens themselves, which are merely software, with the alleged investment contracts pursuant to which those tokens were sold. Rather than analyzing each individual transaction on its own, as is required under the law, the OAG paints ETH with a broad brush, asserting that all ETH tokens are securities. The OAG pays no heed to the transaction in which each token was acquired, or what they are used for.