New York AG goes after the Ethereum blockchain

A lawsuit against a cryptocurrency exchange by the state of New York is much more like a referendum on the second largest blockchain in the world, Ethereum.

Why it matters: Ether has a market cap of nearly $200 million and about 400,000 daily users. Its popularity was partly driven by the fact that entrepreneurs had become convinced that the currency was exempt from securities regulations.

Details: New York Attorney General Letitia James announced a lawsuit against the crypto exchange KuCoin on Thursday, noting specifically that it is the first lawsuit alleging that ether is a security.

• KuCoin is the fourth largest crypto exchange by volume, according to CoinMarketCap. Founded in 2017, it has $3.1 billion in assets on its platform and does more than $700 million in daily volume.
• The complaint found that it violated the law by selling commodities and securities that were not properly registered in New York State, that it was offering a restocking product similar to the one that got a US-based exchange into trouble with the SEC and that it did not register as an exchange in the state.

In the weeds: The complaint goes out of its way to claim that ether (ETH) is a security under existing law.

• It details the initial coin offering that funded Ethereum’s development. It then draws attention to the network’s transition to a new consensus mechanism as evidence that a small group retains control of the network.
• “The developers of ETH promoted it as an investment dependent on the growth of the Ethereum network,” the complaint notes.

• Independent operators verifying the validity of transactions on the blockchain are automatically paid in new ethers issued by the network, securing the ledger from manipulation.

Of interest: To verify that several cryptocurrencies were available in the state on KuCoin, a detective bought and sold digital assets on the platform within its borders.

KuCoin did not immediately respond to a request for comment.

It comes down to: The AG seeks the payout of New Yorkers’ ill-gotten gains, injunctions, and other remedies.

Yes but: What everyone in the distributed ledger industry will actually be looking at is whether the court supports New York’s claim that the world’s second-largest cryptocurrency should be regulated as a security.