FUD 2.0 is here: could Ethereum become unavailable for trading in the US in the future?

The New York Attorney General’s office sued the KuCoin exchange, calling the assets traded there ETH, LUNA and UST securities. The judge called them speculative assets whose value depends on the efforts of third-party developers to provide profits to their holders. Given U.S. case law, this legal attack could have big implications for Ethereum’s future.

Briefly about the most important things

A chronology of events that preceded the KuCoin attack:

• Gary Gensler, head of the SEC, had previously warned several times about the dangers of Ethereum being recognized as a security asset, following that blockchain’s transition to the new PoS consensus.
• The SEC shut down Kraken’s staking service, taking the first step in carrying out the threats previously voiced. We already wrote at the time that this would have far-reaching consequences for Ethereum.
• Yesterday, the New York State Attorney General’s Office (NYAG) sued cryptocurrency exchange Kucoin, claiming that the ETH it trades is a security.
• Unexpectedly for many, the head of the CFTC says Ethereum is a commodity (not a security), and he has a serious legal defense to support his argument.

Expert Sasha Hodder, founder of a law firm that helps companies operate legally in the digital asset space, commented on the news:

“Anyone selling Ethereum in the US, even with a NY Bit License, will likely need to block NY customers. KuCoin didn’t respond to the subpoena, so I am unsure if they will fight here or ignore it since they are outside the US.”

Judge Leticia James, who sued KuCoin for selling securities, makes these arguments for why ETH is a security:

1. ICO from ETH Foundation to fund network development (Americans were originally forbidden to participate in ICOs, but in reality it has almost no control).
2. Shift from PoW to PoS. New PoS consensus — fits perfectly with the description of the security-asset according to the Howey test.
3. Promoted as an investment on ETH foundation website.

Is Ethereum officially a security? A lawsuit against KuCoin by the New York Attorney General could have major consequences for investors in ether and other proof-of-stake cryptocurrencies.@skesslr @cheyenneligon explainhttps://t.co/xMnyiCDwkr

— CoinDesk (@CoinDesk) March 9, 2023

What we think about it

There is nothing surprising about this story for us. After all, back last year we warned that Ethereum could be legally attacked at any moment after the move to PoS. As has long been the tradition, the tech public often ignores legal threats, making their decisions without regard to risk, which is what happened in the case of Ethereum. 

The SEC has been quite careful to attack this crypto segment, first by warning verbally, then by attacking staking (the service was provided by Kraken, but it could be any other similar Ethereum service provider), and now it finally attacked a secondary exchange, for the fact of selling Ethereum itself. The regulator is cautiously raising the level of the attack, as if to test how far it can go.

Another interesting aspect of this story is the public conflict of branches of government. Previously, the CFTC has repeatedly challenged the SEC’s right to regulate cryptocurrencies. In our case today with the Ethereum attack, we see a public disagreement between the CFTC and another government agency.

Now many experts think that the Ethereum attack case will follow the Ripple attack algorithm and will last for years, but considering the confrontation between the CFTC and the SEC, Ethereum may have a very powerful government defender (which was not the case with Ripple). Ultimately, this will likely lead to a fight between the CFTC and SEC for the right to regulate the crypto industry (which is good for Ethereum because it takes the attack vector away from it).

Certainly, this litigation will have huge implications for the crypto industry. Going forward, the case against Ethereum will affect all cryptocurrencies based on PoS, which is pretty much of so-called Ethereum killers that are based on similar principles (and many others lesser known in the market).

Ethereum has already reacted to the news with a sharp correction of 7%. We’ll see how things progress further, but investors in ETH will have very nervous times.