March 9, 2023, the New York State Attorney General’s Office (NYAG) filed a lawsuit against crypto trading platform KuCoin. The lawsuit alleges that the platform failed to register as a securities and commodities broker-dealer and falsely represented itself as an exchange. The NYAG has claimed that the Ether (ETH) traded on the platform is a security, making this the first time that a U.S. regulatory authority has taken this stance. 

The NYAG complaint alleges that KuCoin issued and sold a security called “KuCoin Earn,” which earned a profit for both KuCoin and investors. The NYAG seeks restitution and disgorgement, as well as a permanent injunction that would require KuCoin to block New York residents.

Additionally, the NYAG alleges that Vitalik Buterin and the Ethereum Foundation managed ETH’s development through significant influence, from Ethereum’s initial launch to facilitating Ether’s transition to proof-of-stake. The complaint also alleges that Mr. Buterin and his co-founders directed an initial coin offering (ICO) selling ETH to fund the formation of Ethereum. Thus, the NYAG argues, the facts deem ETH a security under both New York and federal law. 

The NYAG’s current position on ETH has apparently changed over the years. A former director of the SEC’s Division of Corporation Finance made a speech in 2018 in which he stated that the Ethereum network had become sufficiently decentralized such that the facts did not deem it a security under the applicable legal test. However, in recent times, it appears that changes in Ethereum’s technology may have an impact on how the legal test is applied. In September of 2022, Ethereum made the switch to proof-of-stake, and cryptocurrencies offering staking services may pass the legal test because investors expect income based on “the efforts of others.”