Kraken Strikes Back Against “Intimidation Tactic” SEC Lawsuit

Cryptocurrency exchange Kraken is seeking to dismiss the lawsuit filed against it by the Securities and Exchange Commission (SEC) in November 2022.

In its motion, Kraken alleges the SEC retaliation for the exchange’s testimony to Congress about the inadequacy of crypto regulations and SEC overreach.

TLDR

• Kraken testified to Congress in May 2023 that current laws inadequately regulate crypto and the SEC overreaches its authority, and the next day the SEC notified Kraken it would sue.
• Kraken argues in its motion to dismiss that none of the assets listed in the SEC complaint are investment contracts under the law because there is no contract between token buyers and issuers.
• The SEC’s new “digital asset security” concept and “ecosystem” theory to say anything increasing in value is an investment contract have no legal precedent according to Kraken.
• Kraken claims the assets in question do not meet the Supreme Court’s Howey test requirements to be considered investment contracts.
• Kraken says allowing the SEC case based on overreach of authority could let the SEC claim jurisdiction over trading cards, watches, diamonds etc. as securities.

Specifically, Kraken claims that the day after it testified to the House Financial Services Committee and House Agriculture Committee in May 2023, the SEC notified Kraken of its intention to take legal action. In its testimony, Kraken had stated that current laws do not properly regulate digital assets, called for Congressional rules tailored to crypto, and said the SEC’s authority should be limited in favor of other agencies.

In its dismissal motion, Kraken argues that none of the assets named in the SEC complaint meet the legal definition of a security. For decades, courts have required the SEC identify an investment contract between token buyers and issuers to claim jurisdiction. Yet the SEC’s complaint puts forth a new ‘digital asset security’ concept without precedent and does not identify any contracts related to the assets named.

Similarly, Kraken states that the SEC’s new theory that anything gaining value in a crypto ‘ecosystem’ constitutes a security also has no legal basis. Further undermining the SEC’s case according to Kraken is that the assets named do not satisfy the Supreme Court’s Howey Test requirements that an investment contract involve investment of money in a common enterprise with expected profits from others’ efforts.

Allowing the SEC case to move forward raises concerns about agency overreach per Kraken. The exchange argues that the SEC’s logic would grant it excessive power over commodities trading as well with no limiting principle. As an example, Kraken claims the theories could designate items like trading cards or diamonds as securities.

In its motion, Kraken states that the appropriate way to build regulatory guidelines for digital assets is through Congressional action, not via regulatory litigation. The exchange alleges the SEC has only claimed authority over assets like those named in past year to target crypto firms. Kraken urges dismissal on grounds that the Major Questions Doctrine prevents agencies from greatly expanding jurisdiction without explicit Congressional delegation.