Kraken, a cryptocurrency exchange, has submitted a motion to dismiss a lawsuit filed against it by the United States Securities and Exchange Commission (SEC) in November. In its motion, Kraken argues that the lawsuit sets a dangerous precedent for the SEC’s jurisdiction. The company claims that the theory put forth by the SEC has no limiting principle and would grant the agency boundless authority over commerce, potentially opening the floodgates to private securities law claims. Kraken goes on to state that this theory could classify ordinary assets or commodities, such as sports memorabilia, trading cards, watches, and even diamonds, as securities.
The SEC’s lawsuit against Kraken alleges that the exchange unlawfully generated millions of dollars from transactions involving “crypto asset securities” and provided services as an exchange, broker, dealer, and clearing agency without proper registration. Additionally, the SEC accuses Kraken of having deficient internal controls that resulted in the commingling of $33 billion worth of customer assets with business funds.
Kraken’s motion argues that the SEC failed to demonstrate that the cryptocurrencies traded on the exchange qualify as “investment contracts” under US securities laws. The company states that there was no agreement between Kraken customers and the cryptocurrency issuers, and therefore, the customers did not invest money in an enterprise, participate in a common enterprise with issuers, or reasonably expect profits from the efforts of issuers.
Kraken further contends that the SEC’s definition of a security could potentially classify any simple asset sale with a speculative purpose, such as comic books and baseball cards, as securities. The company believes that securities laws have never granted the SEC such vast authority.
The major questions doctrine, a ruling by the US Supreme Court in 2022, is also invoked by Kraken as a basis for dismissing the case. This doctrine states that Congress intends to pass laws rather than delegate authority to regulators. Other cryptocurrency firms, including Binance, Coinbase, and Terraform Labs, have similarly cited this doctrine in their attempts to dismiss SEC lawsuits.
The US Congress is currently engaged in discussions on how to regulate cryptocurrencies, with multiple bills at various stages of development. Last year, Kraken testified before a Congressional hearing focused on crypto regulation, advocating for a framework that limits the SEC’s authority and expands the Commodity Futures Trading Commission’s oversight of exchanges.
Kraken claims that the SEC’s decision to sue the company came the day after its testimony at the Congressional hearing. The company views this timing as evidence of a retaliatory action by the SEC.
In conclusion, the article explores the question of whether SEC Chair Gary Gensler has the final say in crypto regulation.