Kraken warns that the SEC’s claims could shake up the financial structure of the United States

Last Updated: May 10, 2024 8:45am EDT | 3 minute read

Cryptocurrency exchange Kraken has urged the US court to dismiss the SEC’s charges against it to avoid a “significant shake-up” of the US financial regulatory structure.

In November 2023, the Securities and Exchange Commission (SEC) filed a lawsuit against Kraken. The SEC alleged that he operated an unregistered securities trading platform.

This lawsuit came months after the resolution allegations about Kraken’s previous staking service.

In February 2024, Kraken has filed a motion to dismiss the lawsuitarguing that it relied solely on a registration-based argument regarding Kraken’s business as an unlicensed securities entity.

Kraken argued that cryptocurrencies listed as SEC compliant should be treated as commodities and not securities.

However, Kraken has now stepped up its stance, urging the court to dismiss the charges to avoid a “significant shake-up” of the U.S. financial regulatory structure, according to documents filed Thursday in the Northern District of California.

The SEC filed a opposition to Kraken’s motion to dismiss, asserting that its enforcement action falls within the authority granted by Congress. They highlight its role in enforcing registration requirements for securities intermediaries.

“In applying the Howey test to determine whether Kraken must register, the SEC is simply following its congressional mandate.”

They also said he is not overstepping his powers and does not need to “enact bespoke laws for every new technology that emerges”.

Kraken’s response to the SEC’s motion focuses on interpreting the SEC’s jurisdiction through the Howey test.

This evaluates whether an investment qualifies as a security based on 4 main criteria: investment of money, expectation of profits, joint venture, and dependence on the efforts of others. Kraken’s lawyers objected:

“The SEC cannot satisfy Howey’s additional requirement that there be investments of money in a joint venture with a reasonable expectation of profits based on the efforts of others.”

According to Kraken, the SEC’s interpretation would unnecessarily expand its jurisdiction beyond what was intended, potentially dramatically changing the financial regulatory environment. They said:

“This would destroy Howey by significantly expanding the SEC’s jurisdiction to a range of investment activities that have never been delegated to the agency. Such a significant reorganization of the US financial regulatory structure should be debated in Congress, not the courts.”

SEC in question for hammering cryptocurrencies

Kraken is just one of many leading cryptocurrency companies fighting with the SEC. Coinbase, Uniswap, Metamask, and Robinhood also received regulatory actions.

Despite making no progress on individual cases, the SEC continues to do so challenge the main players in the sector.

In 2023, like Kraken, Coinbase has engaged in a battle with the SEC after the federal agency accused the cryptocurrency exchange of selling unregistered securities.

Coinbase’s legal counsel had asked D.C. Judge Katherine Polk Failla to determine whether or not the matter falls within the agency’s delegated authority.

During a January hearing, Failla opposed Coinbase’s request to limit the SEC’s regulatory reach.

Anyway, Judge Failla he put the case on hold questioning the SEC’s overreach in their claims. He stated:

“I fear that I would do exactly what you suspect the Commission is doing here, which is to take power without having to stop activities that I shouldn’t stop.”

The crypto community stands with Kraken in the fight against the SEC

The ongoing assault on the cryptocurrency industry has prompted many figures to speak out, citing the SEC’s anti-cryptocurrency agenda as an attempt to push cryptocurrencies out of the United States.

Co-founder of Ethereum Joseph Lubin criticized the SEC’s approacharguing that instead of promoting open discourse and providing clear regulatory guidance, the SEC has opted for strategic enforcement actions.

This has caused unease in the cryptocurrency industry amidst such regulatory uncertainty, causing US investors to become reluctant to enter this space. Lubin commented:

“The SEC probably doesn’t want to see a wave of innovation that’s really going to transform the landscape.”

In February 2024, the Crypto and Financial Technology Advocacy Group (CFAT), which includes prominent figures such as Paradigm, Coinbase and Ledger, filed a lawsuit against the SEC.

This was done under the claim that “the SEC’s new attempt to extend its regulatory power to virtually all digital assets goes far beyond the scope of its statutory authority.”

The CFAT also supported this The SEC’s ruling-by-enforcement approach has hindered cryptocurrency innovation. They claim that the SEC has:

“We have left this trillion-dollar industry in a state of unsustainable uncertainty, subject to the arbitrary whims of an agency with an overly broad view of its own authority.”

Therefore, Kraken’s position on the issue required dismissal. In order to continue, the SEC must reevaluate the current U.S. legal framework. Unless they stop exceeding their authority.

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