Kraken Tells Court SEC Overreaching in Attempts to Regulate Crypto as Securities

News | May 23, 2024 By:

On Thursday, May 9, 2024, crypto exchange Kraken filed its reply brief in an ongoing securities lawsuit brought by the U.S. Securities and Exchange Commission (SEC).

In the brief, Kraken argued that the SEC has failed to establish its claim that certain digital assets traded on the platform should be legally considered “investment contracts” and thus subject to federal securities laws. For an interest to qualify as an investment contract under the Howey test, which was established by the Supreme Court, there generally needs to be an agreement where capital is invested in a common enterprise with profits derived from the efforts of others.

However, Kraken claims that in this case, the SEC has not identified any specific contracts or agreements that meet this standard. While some initial coin offerings for particular digital currencies may have contained contractual terms establishing them as investment contracts, Kraken asserts that subsequent trades of those assets on its platform do not involve the same legal obligations or agreements. The brief argues the economic realities and characteristics of primary issuances should not be conflated with independent secondary market trades that occur later without any ongoing contractual duties.

Kraken also maintains that the SEC is attempting to improperly expand the definition of “investment contract” beyond what is supported by case law. The exchange stated that no Supreme Court or Ninth Circuit decision has found an investment contract without accompanying contractual obligations or duties. Numerous prior rulings were cited as confirming investment contracts require some post-purchase commitments rather than merely promotional statements.

In addition, the reply brief contends the SEC’s theory could inappropriately allow the agency to regulate any asset as a security simply by claiming the digital currency has a related “ecosystem” being developed. This broad interpretation would go beyond the authority granted by Congress, according to Kraken. Eight state attorneys general also filed an amicus brief, agreeing the SEC’s position conflicts with earlier case precedents.

Kraken is seeking dismissal of the SEC’s claims that it operated as an unregistered national securities exchange, broker, and clearing agency. A hearing on the motion to dismiss is scheduled for June 12, 2024.

Please contact BlockTribune for access to a copy of this filing.