ajor cryptocurrency exchange KuCoin has agreed to pay $22 million and terminate access for users in New York state to settle charges it violated securities laws. According to court documents, KuCoin will refund $16.77 million to New York customers and pay $5.3 million to the New York Attorney General. This marks the first time a regulator claimed in court that Ethereum (ETH) is a security.
Background on the NYAG Lawsuit
In March 2023, New York Attorney General Letitia James filed a lawsuit against KuCoin, claiming the exchange offered digital tokens like ETH without registering as required under state securities laws. Specifically, the NYAG argued that ETH met the definition of a security under the Howey test since its initial sale constituted an investment of money in a common enterprise with profits derived solely from the efforts of others.
This was significant as the first time a top regulator had taken the position in court that ETH is a security. While the US Securities and Exchange Commission (SEC) has said most digital assets should be evaluated on a case by case basis, the NYAG directly made the case that ETH qualified as a security from its inception. KuCoin disputed the claims but ultimately chose to settle rather than fight the case in court.
Under the terms of the settlement, KuCoin will pay $5.3 million to the New York Attorney General's office. Additionally, the exchange agreed to provide $16.77 million in refunds to New York customers for open orders and trading positions that had not been closed as of the date of the agreement.
Perhaps most significantly, KuCoin also agreed to terminate access to its services for users located in New York within 120 days and to close all relevant accounts of New York residents.
While the platform can still theoretically be accessed in the state through a VPN, this settlement makes clear KuCoin will no longer actively offer or support customers based in New York going forward.
Reaction and Implications
The settlement was announced via a tweet by KuCoin CEO Johnny Lyu, who stated it solidified the company's "commitment to compliance operations." For regulators, the case establishes a useful precedent that ETH can be regulated as a security, allowing greater oversight of the token's issuance and trading on exchanges.
However, it also showed the challenge of applying outdated securities laws to an emerging asset class.
Many in the crypto community argued the NYAG overreached in directly classifying ETH as a security when top federal regulators like the SEC had not taken a clear stance. The settlement avoids a court battle that could have set binding precedent, for now leaving the legal status of ETH and other cryptocurrencies uncertain.
But it served as a warning for centralized exchanges to register offerings appropriately or risk facing legal action.