Deaton Plans to Counter Suit As Regulators Allege Ethereum is Security After XRP

After XRP, Regulators Allege Ethereum (ETH) Is a Security.

The NYAG alleges that ETH passes Howey’s test, positing that it “is a speculative asset that relies on the efforts of third-party developers to provide profit to the holders.”

New York Attorney General (NYAG) Letitia James yesterday filed a lawsuit against KuCoin for operating in the state and failing to register as a securities and commodities broker-dealer while offering alleged securities.

Attorney General James seeks to prevent the popular crypto exchange from serving New York residents until it becomes compliant. However, what has turned heads and grabbed headlines is that, as highlighted by the NYAG in a press release, it is likely the first by a regulator alleging Ethereum to be a security. 

The NYAG alleges that ETH passes Howey’s test, positing that it “is a speculative asset that relies on the efforts of third-party developers to provide profit to the holders.” The full complaint filed with the court cites Ethereum’s Initial Coin Offering (ICO), transition to proof-of-stake and promotion on the Ethereum Foundation’s website as an investment as supporting reasons for the claim, with Attorney General James drawing significant attention to the influence of Vitalik Buterin and Ethereum Foundation on the direction of the network. 

Interestingly, the views laid out by the NYAG closely resemble those often outlined by United States Securities and Exchange Commission (SEC) Chair Gary Gensler. Notably, Gensler has posited that Ethereum’s transition to proof-of-stake makes it more like a security. 

Consequently, it may surprise many that this lawsuit is coming from the NYAG and not the SEC. However, pundits like CryptoLaw founder Attorney John E. Deaton have asserted that the regulators are working together. 

“If you think there isn’t coordination between the SEC and NYAG you’re not paying attention,” the attorney tweeted yesterday.

What is more of a surprise is that despite the NYAG’s latest enforcement action against KuCoin, other crypto exchanges registered in the state without securities and commodities broker-dealer licenses offer ETH trading with the approval of the state regulator. 

“It’s not like New York had no idea that ether was being offered. They knew for years because to get a license and to register in New York, you actually have to have the assets that you plan to offer to New Yorkers green-listed by their financial regulator,” Collins Belton, a California-based crypto attorney and partner at Brookwood P.C. said per a CoinDesk report. 

According to the attorney, the New York Department of Financial Services (NYDFS) has allowed registered exchanges to offer Ethereum trading for at least five years. Consequently, the latest claims are mind-boggling.

Bill Morgan (@Belisarius2020), a pro-XRP attorney leaning into the coordination narrative between the SEC and the NYAG, asserted that the move was likely intended to start after the SEC case against Ripple over the classification of XRP. However, he speculates that a projected trial in the Ripple case instead of an SEC summary judgment victory has pushed the regulators to hasten the timeline. 

Deaton Plots Counter Class Action Suit

Deaton, who already represents thousands of XRP holders in the SEC case against Ripple as a friend of the court, has launched multiple portals for members of the Ethereum community to sign up for a class action suit refuting the claims. 

“ETH is NOT a security,” the attorney wrote in a two-tweet thread today. “We will seek to have our voices heard in Court and not let these career bureaucrats pretend to protect us.” 

We will seek to have our voices heard in Court and not let these career bureaucrats pretend to protect us. Your name/ email will not be shared w/anyone. It is a Google form and if you don’t have a Google account you can email all-deaton@deatonlawfirm.com and request to join.

— John E Deaton (@JohnEDeaton1) March 10, 2023

Recall that in October, the attorney had pointed out that he also held ETH and would have sued the SEC if it came after Ethereum. 

If the NYAG can convince the court of her claims, exchanges in New York could be forced to delist ETH, block ETH trading for New York residents, or register for a securities and commodities broker-dealer license.