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Kraken vs SEC: Exchange Claims Commission Does Not Know What a Security is

Last Updated May 10, 2024 10:46 AM
Teuta Franjkovic
Last Updated May 10, 2024 10:46 AM
By Teuta Franjkovic
Verified by Peter Henn

Key Takeaways

  • Kraken argues that the SEC’s use of broad terms fails to meet the legal standards for identifying securities violations.
  • The core dispute is whether the SEC’s authority extends to Kraken’s operations and its application of the Howey test.
  • The resolution of this case could set a precedent for how the SEC oversees the cryptocurrency industry moving forward.

The dispute between Kraken and the US Securities and Exchange Commission (SEC) has heated up. A recent filing  from the crypto exchange challenged the phrasing of the SEC’s allegations.

Kraken’s response argues that the regulator’s use of terms like “investment concept” and “ecosystem” is, legally speaking, imprecise.

Kraken Fights Back Against SEC, Slams Agency’s Case as Flawed

Kraken responded to the SEC’s April correspondence  about its motion to dismiss the lawsuit. The crypto exchange strongly denies the SEC’s accusations of that it assisted in the trading of unregistered securities. Kraken claimed Gary Gensler‘s group lacked precision and did not understand fundamental legal concepts.

Kraken also said that the SEC incorrectly used the terms “investment concept” and “ecosystem”. It argued the correct legal terms were “investment contract” and “enterprise”. This implies that Kraken thinks the SEC does not know what it is talking about.

Kraken also claims the SEC did not understand what an investment contract was. It also said the SEC addressed arguments Kraken never made. This, in turn, suggests Kraken thinks the regulator does not understand the issues at the heart of the case.

Court Battle Centers on SEC’s Regulatory Reach

In its April filing,  the SEC said that the specific wording did not strictly define the type of security involved. It added that “the reach of the act does not stop with the obvious and commonplace”.

The SEC submitted a 39-page opposition to Kraken’s motion to dismiss the case. It argued its actions were within its remit.

The filing said: “The SEC was established by Congress to enforce the Securities Act and Exchange Act, which includes requiring securities intermediaries to register with the SEC.”

The SEC defended its application of the Howey test, which assesses whether a transaction is as an investment contract and, therefore, a security.

The SEC also countered claims that it was overstepping its authority or that new laws need to be created for every new technology.

Meanwhile, Kraken’s attorneys argue that the SEC’s application of the Howey test in this case overreaches. They said:

“This would significantly expand the SEC’s jurisdiction to a host of investment activities that were never delegated to the agency.”

Kraken says Congress, not courts, should decide on the matter.

Kraken vs. SEC Case Could Shape Future of Crypto Regulation

In November 2023, the SEC charged Kraken with operating as an unregistered broker, dealer, exchange, and clearing agency. This is part of a broader regulatory pattern, because the agency has lodged similar charges against other crypto platforms such as Binance and Coinbase. Additionally, in February last year, Kraken, whose parent company is Payward Inc, reached a settlement with the agency  on separate charges concerning its staking services.

Kraken is using precedents from previous SEC cases involving initial coin offerings (ICOs) to bolster its defense. The exchange argues that these cases, which centered around contractual rights and obligations, support its interpretation of an investment contract is.

In its response, Kraken stressed the importance of sticking to the plain language used in statutes.

The clash between the exchange and the SEC is not just a legal standoff. It could go on to shape regulation for the entire cryptocurrency industry.

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