On March 9, New York Attorney General Letisha James filed a complaint against leading cryptocurrency exchange KuCoin, alleging violations of the Martin Act, which prevents security sales fraud. AG James claimed that Ethereum — the second-largest cryptocurrency by market capitalization — is a security in the first regulator-initiated court claim.

AG James’ complaint alleged that KuCoin engaged “in the business of effecting transaction in securities” based on its sales of Ethereum. Starting in 1936, New York courts defined a security as “any form of instrument used for the purpose of financing and promoting enterprises, and which is designed for investment.” Based on this test, AG James argued that Ethereum is a security because the promoters (1) raised funds to develop the Ethereum network; (2) retained large positions of Ethereum to fund Ethereum’s development; (3) referred to Ethereum as an investment on the Ethereum website; and (4) used Ethereum to generate staking rewards for investors.

“Staking” refers to an environmentally-friendly security mechanism that allows cryptocurrencies to secure their networks, thus incentivizing good behavior on the Ethereum network. Holders of a cryptocurrency “stake” Ethereum in exchange for the ability to “validate” transactions on the blockchain, while earning additional Ethereum for doing so. The mechanism works because if a “validator” validates a malicious transaction, their staked Ethereum is taken away. Ethereum formerly relied on a “proof-of-work,” a carbon-intensive consensus mechanism used by Bitcoin — the only cryptocurrency regulators view as a commodity. However, Ethereum switched to a proof-of-stake mechanism in 2022 to become more sustainable and increase network performance.

Why It Matters

Securities regulators have long alluded to the belief that cryptocurrencies relying on proof-of-stake mechanisms for validation could meet the definition of an investment contract. AG James’ action constitutes yet another action by state and federal regulators that, despite concerns from industry participants, seeks to require cryptocurrency market participants to comply with securities laws.

Troutman Pepper State Attorneys General Team

	Ashley Taylor – Co-leader and Firm Vice Chair Ashley is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. He focuses primarily on federal and state government regulatory and enforcement matters involving state attorneys general, the Consumer Financial Protection Bureau (CFPB), and the Federal Trade Commission (FTC). Drawing upon his experience as a deputy attorney general, Ashley has developed an extensive consumer practice with regard to the consumer financial services industry.
	Clay Friedman – Co-leader Clay is a partner in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group and co-leader of the State Attorneys General practice. Informed by nearly a decade in a state attorneys general office, and more than 25 years in private practice, Clay spends much of his time representing clients in singular or multistate regulatory actions. Clay has repeatedly led teams before all 50 state attorneys general and also handles matters with the Federal Trade Commission, the Consumer Financial Protection Bureau, and other local, state and federal agencies.
	Stephen Piepgrass Stephen represents clients interacting with, and being investigated by, state attorneys general and other enforcement bodies, including the CFPB and FTC, as well as clients involved with litigation, particularly in heavily regulated industries.
	Avi Schick A former deputy attorney general of New York, Avi applies his experience in bet-the-company matters, representing clients in criminal and civil investigations and enforcement actions before state and federal regulators, prosecutors and enforcement agencies.
	Michael Yaghi Michael handles high-profile state attorneys general, FTC, and CFPB investigations by advising clients through these complex government inquiries. He assists clients through the entire life cycle of investigations, from regulatory enforcement through formal litigation.
	Ketan Bhirud As a former government official at the state and federal level, Ketan leverages extensive experience in the public and private sectors to skillfully represent client interests.
	Tim Bado Tim is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, with a primary focus on financial services litigation.
	Chris Carlson Chris represents clients in regulatory, civil and criminal investigations and litigation. In his practice, Chris regularly employs his prior regulatory experience to benefit clients who are interacting with and being investigated by state attorneys general.
	Natalia Jacobo Natalia is an associate in the firm’s business litigation practice. She recently received her J.D from the University of California, Davis School of Law.
	Namrata Kang Namrata is an associate in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group, based in the Washington, D.C. office. Her work includes advising clients in regulatory investigations and compliance matters, in addition to representing clients in civil litigation matters.
	Whitney Shephard Whitney is an attorney in the firm’s Regulatory Investigations, Strategy + Enforcement (RISE) Practice Group. She represents clients facing state and federal regulatory investigations and enforcement actions, as well as related civil litigation.
	Stephanie Kozol Stephanie is Troutman Pepper’s senior government relations manager in the state attorneys general department.