Crypto venture capital firm Paradigm filed an amicus brief in the case between the New York Attorney General (NYAG) and KuCoin because the regulator described Ethereum (ETH) as securities in the lawsuit.
In March, the NYAG sued KuCoin for operating in the state without registering — adding that the exchange facilitated the trading of tokens like ETH, which are allegedly securities.
However, Paradigm disagreed with the regulator’s classification of Ether as security. In its amicus brief, the firm said:
“[New York authorities] were trying the due process side door: alleging that the world’s second most valuable token is a security in an action against an unrelated third party who is unlikely to argue otherwise.”
Paradigm explains why ETH is not security
According to the May 18 court filing, NYAG’s argument that ETH tokens are securities is unsupported by law because the asset is “just software, ‘little more than [an] alphanumeric cryptographic sequence.’”
“The OAG conflates ETH tokens themselves, which are merely software, with the alleged investment contracts pursuant to which those tokens were sold.”
Paradigm further argued that the regulator’s reliance on the embodiment theory — espoused by the U.S. Securities and Exchange Commission (SEC) — would present insurmountable difficulties for market participants seeking to transact cryptocurrency tokens.
In its lawsuit against Ripple, the SEC argued that a token sold as part of an investment contract trading on a secondary market now embodies and represents the “investment contract.”
Paradigm added that ETH’s transition to the proof-of-stake consensus does not morph the asset into a security. The firm wrote that ETH validators are being paid for providing a service and did not enter into an investment contract, as the New York authorities argued.
“Staking does not cause ETH to increase in value, and does not provide interest to users, and as such, there are no “profits”; staking is just a way to acquire…
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