Ether a Security? That Could Have Huge Ramifications for Crypto, Legal Expert Says

If ether (ETH) is deemed a security by a state court it could prompt federal regulators to act against a major crypto asset, said Tonya Evans, a professor at Penn State University Dickinson Law.

On Thursday, New York State Attorney General Letitia James filed a lawsuit against KuCoin for allegedly violating securities laws in the state by offering tokens – including ether – that meet the definition of a security without registering with the Attorney General’s office.

One of those tokens listed in the lawsuit is the Ethereum blockchain's ether, the second-largest cryptocurrency by market cap. Seychelles-based KuCoin is the fourth-largest crypto exchange in the world, according to CoinMarketCap data.

Evans said on CoinDesk TV’s “First Mover” on Friday that if the New York Attorney General prevails, defining ether as a security could have huge ramifications for the crypto world. Whether it is deemed one is likely to depend on what approach state and federal regulators take in defining the digital asset, but she said she doesn’t see how ether could be considered a security.

“I'm still unpacking that filing by Attorney General James, to really understand how a security is defined under state law. Obviously, it very much mimics the Howey Test from the [U.S.] Supreme Court case, of course, but oftentimes at the state level,” Evans said.

Once there are "federal guidelines, rules, regulations and laws that may preempt state law, oftentimes you'll see things percolate up from the states and eventually make it before the [U.S. Supreme Court] to render the ultimate determination. And this is what we often see" in new and emerging asset classes and industries, she said.

Nonetheless, the U.S. should be cautious about alienating the crypto industry and forcing it out of the country because it would be operating without U.S. regulatory oversight to protect investors, she said.

“If we're pushing this type of ecosystem offshore it will be more and more difficult for lawmakers and regulators to actually reach the point of keeping this ecosystem vibrant in the United States with clear and defined rules,” Evans said.

Read more: New York Attorney General Sues Crypto Exchange KuCoin, Alleges Ether Is a Security