Kraken, a cryptocurrency exchange, has submitted a motion to dismiss a lawsuit filed 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 limitations and would give the agency unlimited authority over commerce, potentially leading to an influx of private securities law claims. Kraken further argues that this theory could classify ordinary assets like sports memorabilia, trading cards, watches, and diamonds as securities.
The SEC’s lawsuit against Kraken alleges that the exchange unlawfully made millions of dollars from transactions involving “crypto asset securities” and provided various services without registering with the agency as required by law. The agency also accuses Kraken of having deficient internal controls, resulting in the commingling of $33 billion worth of customer assets with business funds.
Kraken’s motion contends that the SEC failed to prove that the cryptocurrencies traded on the exchange were investment contracts under US securities laws because there was no agreement between Kraken customers and the cryptocurrency issuers. The company argues that its customers did not invest money in an enterprise, did not participate in a common enterprise with the issuers, and did not expect profits from the issuers’ efforts.
Additionally, Kraken argues 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 asserts that securities laws have never granted the SEC such extensive authority.
Kraken also invokes the major questions doctrine, a 2022 US Supreme Court ruling that states Congress aims to pass laws rather than delegate authority to regulators. Other crypto firms, including Binance, Coinbase, and Terraform Labs, have also cited this doctrine in their attempts to dismiss SEC lawsuits.
The regulation of crypto is currently being debated in the US Congress, with multiple bills in various stages of development. Kraken previously testified before a congressional hearing focused on crypto regulation and advocated for a framework that limits the SEC’s authority while expanding the Commodity Futures Trading Commission’s jurisdiction over exchanges. Kraken claims that the SEC’s decision to sue them came immediately after their testimony.