Kraken files to dismiss SEC suit — ‘Dangerous precedent’ for overreach

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Crypto exchange Kraken has filed to dismiss a November lawsuit from the United States Securities and Exchange Commission, arguing it sets a “dangerous precedent” for the agency’s remit.

On Feb. 22, Kraken filed its dismissal motion with a San Francisco federal court. In an accompanying blog post, Kraken stated:

“The SEC’s theory is that there can be an investment contract with no contract, no post-sale obligations and no interaction at all between the issuer and the purchaser.”

The theory means it “has no limiting principle” and would grant the SEC “boundless authority over commerce and potentially open up the floodgates to private securities law claims,” it argued.

“It would turn a broad range of ordinary assets or commodities, like sports memorabilia, trading cards, expensive watches, or even diamonds, into securities,” added the firm.

The SEC sued Kraken last year, alleging it unlawfully made millions of dollars from “crypto asset securities” transactions and provided “exchange, broker, dealer, and clearing agency” services without having registered with the agency “as required by law.”

The agency also accused Kraken of deficient internal controls, which saw $33 billion worth of customer assets commingled with business funds.

In its motion, Kraken said the SEC failed to allege that the cryptocurrencies traded on the exchange were “investment contracts” under United States securities laws as there was no agreement between Kraken customers and the cryptocurrency issuers.

“Kraken customers did not invest money in an enterprise. Kraken customers participated in no common enterprise with issuers. And Kraken customers could not reasonably expect profits from the efforts of issuers,” it argued.

It also argued the SEC’s definition of a security could see it “‘securitize’ any simple asset sale with an alleged speculative purpose like comic books and baseball cards,” and securities laws “have never given the SEC […] such vast authority.”

Related: Texas company mounts court challenge to SEC crypto authority

Kraken added the case should be dismissed due to the major questions doctrine, a 2022 U.S. Supreme Court ruling stating Congress aims to pass laws instead of handing authority to regulators.

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Highlighted excerpt of Kraken’s argument claiming the SEC is trying to expand its authority over crypto. Source: CourtListener

Other crypto firms, including Binance, Coinbase and Terraform Labs, have cited the doctrine in their attempts to dismiss SEC lawsuits.

The U.S. Congress is debating how crypto should be regulated, and multiple bills to govern the industry are at various stages of development.

Last May, Kraken testified before a crypto regulation-focused Congressional hearing that the current laws are inadequate and a framework to limit the SEC’s authority and expand the Commodity Futures Trading Commission’s to cover exchanges should be enacted.

“The very next day, the SEC called Kraken to say it was going to sue,” the exchange said in its latest filing. “And this Complaint followed.”

Magazine: Crypto regulation — Does SEC Chair Gary Gensler have the final say?