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Is Ether a Security?

BusinessCryptoIs Ether a Security?
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Last Thursday morning, I was wondering if I needed to write a follow-up article about Silvergate Bank. On Thursday evening, I was wondering if my main topic should be about Ether which is potentially a security. And then apparently a few things happened.

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Last week New York Attorney General’s Office Sues KuCoin For operating an unregistered securities/commodities broker in the Empire State. Most of the complaints are very straightforward – the NYAG alleges that KuCoin offered tokens that are securities under New York’s common business law. martin actwhat we’ve seen a few times Earlier). More interestingly, the suit alleged that ether (ETH), the second-largest cryptocurrency by market capitalization and the futures product built on top of it, was also a security listed by KuCoin.

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Other details include the fact that KuCoin apparently did not bother to respond to the NYAG’s subpoenas.

why it matters

If Ether is indeed a security, this means that every crypto exchange in the US would need to register with the US Securities and Exchange Commission (SEC) as a securities trading platform and adhere to a strict disclosure regime Which will probably make it difficult for many people. Most, if not all, of these exchanges will continue to operate. But it’s a really big if.

break it

The NYAG sued KuCoin last week under state law, alleging that ether, post-merge, is a security under the proof-of-stake consensus mechanism of the Ethereum blockchain. The NYAG also alleges that TerraUSD (UST) and Luna (LUNA) are securities, as well as KuCoin’s Earn platform. I’m not going to go into the last two – regulators have alleged for some time that “earnings” products are securities, and have entered into agreements with various lenders to support that contention, and look at the TerraUSD/Luna ecosystem. There are other cases.

And not to pull a bait and switch on you, but I don’t have an answer to the question asked in the title of this section. However, I wanted to find out what the outcome of the New York Attorney General’s lawsuit against KuCoin might be.

Matthew Blaine, a New Jersey-based partner at the Davison, Eastman, Munoz, Pone law firm, doesn’t think there will be a huge fallout.

He said in a phone call that the case is likely to end in adjudication.

“If there is a decision that [ether] is an unregistered security, it is not binding on any issues or things of that nature,” he said. “It really only needs to be viewed in the narrow lens through which this case is proceeding.”

He compared the NYAG lawsuit against KuCoin to the US Securities and Exchange Commission (SEC) lawsuit against former Coinbase director Ishan Wahi. In that suit, the SEC alleged that several tokens were securities, but did not sue Coinbase for listing the tokens, or the token issuers themselves.

Similarly, KuCoin has not sued the Ethereum Foundation, only an exchange, Blaine said.

It is also unclear whether the NYAG is seeking registration from these other types of entities, or indeed from other crypto exchanges operating under New York Department of Financial Services ‘BitLicense’.

The NYAG did not return multiple requests for comment, including a question on whether it would require licensed crypto exchanges to register as securities trading platforms.

The NYDFS is, of course, the state banking and financial services regulator overseeing all crypto companies, but the regulator’s authority can be challenged by lawsuits.

A former NYDFS official told CoinDesk that the New York Attorney General’s office and the bank regulator did not have a good relationship during his time at NYDFS, describing those relations as a “perennial power struggle.”

The other factor is, of course, the SEC. SEC Chairman Gary Gensler has been on record (a few times now) saying that he believes proof-of-stake cryptocurrencies are similar to securities. The NYAG’s lawsuit against KuCoin may not set much of a precedent for the SEC, but it’s yet another sign that regulators are starting to narrow down what they’re thinking.

However, at least one judge has little patience with how the SEC is currently approaching questions of whether something is a security. New York Southern District Bankruptcy Court Judge Michael Wiles, Very bad order Explaining its approval of Voyager Digital’s restructuring plan to sell itself binance.usStating that the regulator is not providing any clarity to the industry operators.

“If the current regulatory environment can be characterized as uncertain, then the future regulatory environment can only be characterized, in my mind, as virtually unknowable,” the judge wrote. “There are separate proposals in Congress to adopt different types of regulatory regimes for cryptocurrency trading. Meanwhile, the SEC has filed certain actions against specific firms with respect to certain cryptocurrencies, and those actions suggest that There could be a wider regulatory onslaught.

Reiterating his March 7 oral order, the judge noted that the SEC’s arguments were vague and the regulator did not provide any evidence to support its arguments. binance.us may operate an unregistered securities exchange or the VGX token may be a security.

“However the SEC argued that the debtors had to prove a negative either way – ie the debtors were not violating securities laws and that binance.us Not Violating Registration Requirements for Brokers – The SEC didn’t even affirmatively argue that the debtors were doing anything wrong, or that binance.us was doing anything wrong,” the judge wrote. “Nor did the SEC provide any guidance at all as to what it was that the Debtors allegedly had to prove on these issues, or how the Debtors could possibly prove that the SEC required them to prove without receiving any clarification from the SEC. due to the conduct of the debtors, or binance.usoperations, may raise legal issues.

For further reading, I recommend Article by my colleagues Sam Kessler and Cheyenne Ligon asking what it means if ether is actually considered a security,

So the crypto industry just lost three banks that are actually involved in crypto companies: Silvergate, Silicon Valley, and Signature. Their collapse has been seen as part of a coordinated plot to crypto-jack D-Bank in the US, due to the timing and explosiveness of the near-simultaneous failures.

Following this, crypto companies are looking for alternatives (including CoinDesk, which banks in SVB). While this is going to be an interesting timeline in itself, another question may be what happens with the loss of the Silvergate exchange network and Signet, the two tools created by Signature and Silvergate to allow crypto companies to handle 24/7 transactions. allow process.

Now, Signet is still aliveBut this can change as and when FDIC sells signatures,

A Coinbase spokesperson said the exchange would have an emergency if Signet were to be shut down.

“In that hypothetical situation, there are other players in the market who could step in to fill the void. As we saw over the weekend, crypto is resilient and we will absorb that and move forward just like other events.” the spokesman said.

Dante Disparte, chief strategy officer and head of global policy at stablecoin issuer Circle, said the two services helped build the crypto, though he added that ACH transactions and wire services are also important.

“Whereas [Signet and SEN] In what may go down in history as embarrassing failures, they demonstrated that banks can innovate,” he said.

Another result could be that large banks continue to gain new business while smaller community or regional banks and credit unions lose out, Disparte said.

One such company that was forced to make the change was Circle, whose USDC stablecoin lost its dollar peg for the entire weekend as a result of SVB’s collapse, starting on Friday and continuing even after Circle acknowledged That was $3.3 billion, or about 8%, of USDC reserves. in bank. The stablecoin finally recovered its peg earlier this week.

There is also the matter of whether bank regulators are forcing banks to turn away crypto customers. It’s a conspiracy theory that’s taken on fresh life in recent weeks, with everyone from lawmakers to industry participants claiming “Operation Choke Point 2.0” is real.

Recent guidance from bank regulators, suggestions that Signature and Silvergate were forced to fold due to anti-crypto animus and news of FDIC demands that Signature’s bidders not acquire its crypto business support these claims. has got strength.

However, do not believe it.

“I categorically reject the idea that this is Choke Point 2.0,” he said. “for one thing, [the original, Obama-era] Choke point was secret, [but] It’s clear… some companies create unbankable assets.

CoinDesk has spoken to other individuals, including legal counsel at one exchange and members of a Washington, DC, lobbying group, who do not believe in Choke Point 2.0.

It may well be that banks are just risk averse, and some crypto companies are indeed riskier than others – The signing was reportedly under investigation by the Justice Department before closing.

Austin Campbell, a Columbia University assistant professor and former Paxos executive, told CoinDesk that we may get an answer to the question of whether the choke point is real in the next six months.

“What I am looking for is a clear commercial voice for banks that can control risk. The crypto community should be watching to see if this is allowed, or if the Fed steps in and stops it. ,” They said. “If new banks step up and start servicing all these customers and onboard them, it’s probably going to be a story of risk failures.”



  • 14:00 UTC (10:00 am ET) A hearing in BlockFi’s case against Emergent Fidelity over control of several Robinhood shares took place. Jack Shikler reports that Blockfi has withdrawn its offer without prejudice while the parties work on a possible settlement. A complicating fact could be the fact that the US Department of Justice is also seeking to seize the shares as part of the forfeiture motion.



  • At 18:00 UTC (2:00 pm ET) there will be a plenary hearing in the FTX bankruptcy case.
  • ,wall street journal, The WSJ reports that the US Department of Justice has been investigating the TerraUSD meltdown since last year.
  • ,Sports Illustrated, I don’t follow baseball, nor does this story have anything to do with crypto. It is so funny.


– Dan McMurtry (@SuperMugatu) March 9, 2023

If you have ideas or questions about what I should be discussing next week or any other feedback you’d like to share, feel free to email me [email protected] or find me on twitter @nikhileshde,

You can also join group conversations Wire,

See you next week!

The views and opinions expressed here are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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