Key takeaways:
- Kraken has requested to dismiss a lawsuit from the US SEC from November, claiming that the case establishes a “dangerous precedent” for the agency’s authority.
- The agency charged Kraken with having inadequate internal controls, allowing $33 billion in consumer assets to be mixed with company cash.
The cryptocurrency exchange Kraken has requested to have a lawsuit from the US Securities and Exchange Commission (SEC) from November dismissed, claiming that the case establishes a “dangerous precedent” for the agency’s authority.
Kraken submitted their dismissal motion to a federal court in San Francisco on February 22. Kraken said in a blog post that went along with it:
“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.”
It was suggested that the idea implies that it “has no limiting principle,” giving the SEC unrestricted power over commerce and maybe opening the door to a plethora of private securities law claims. The company continued:
“It would turn a broad range of ordinary assets or commodities, like sports memorabilia, trading cards, expensive watches, or even diamonds, into securities,”
Last year, Kraken was sued by the SEC because it had illegally gained millions of dollars from transactions involving “crypto asset securities,” and it had failed to register as needed by law to provide exchange, broker, dealer, and clearing agency services.
Additionally, the agency charged Kraken with having inadequate internal controls, allowing $33 billion in consumer assets to be mixed with company cash.
Since there was no contract between Kraken users and the cryptocurrency issuers, Kraken claimed in its petition that the SEC had not made the necessary allegations to establish that the cryptocurrencies traded on the exchange qualified as “investment contracts” for the purposes of US securities legislation. It stated:
“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 further asserted that securities rules have never granted the SEC such broad authority. The agency may “securitize” any straightforward asset sale with apparent speculative intent, such as comic books and baseball cards.
Kraken went on to say that the case ought to be dismissed due to the major questions doctrine, a US Supreme Court ruling from 2022 that held Congress seeks to create laws rather than give authority to regulators.
The theory has been invoked by other cryptocurrency companies, including Binance, Coinbase, and Terraform Labs, to get SEC lawsuits dismissed.
Several laws to regulate the cryptocurrency sector are in various stages of development, and the US Congress is now considering how the industry should be governed.
In May 2023, Kraken testified before a Congressional hearing on cryptocurrency regulations, stating that the laws are insufficient and that legislation should be passed to restrict the SEC’s power and increase the Commodity Futures Trading Commission’s (CFTC) jurisdiction over exchanges.
