Kraken Disputes SEC, Warns of Impact on Financial Regulation

Crypto exchange Kraken refutes SEC claims and warns of potential disruptions to US financial regulations.

Preventing a “significant reordering” of the US financial regulatory framework, cryptocurrency exchange Kraken urged the US court to invalidate the SEC’s claims against it.

The Securities and Exchange Commission (SEC) filed a suit against Kraken in November 2023. The SEC asserts that the entity in question operated an unregistered trading platform for securities.

This lawsuit was filed months after Kraken settled allegations about its previous staking service.

Kraken submitted a motion to dismiss the litigation in February 2024, asserting that the plaintiff’s case was founded exclusively on a registration-based argument concerning Kraken’s status as an unlicensed securities entity.

Kraken argued that SEC-compliant cryptocurrencies should be considered commodities rather than securities.

Nevertheless, court documents filed in the Northern District of California on Thursday indicate that Kraken has since strengthened its stance, imploring the court to dismiss the allegations to prevent a “significant reordering” of the financial regulatory framework in the United States.

In opposition to Kraken’s motion to dismiss, the SEC argued that its enforcement action was consistent with the authority Congress granted it. The SEC emphasizes the enforcement of registration requirements for securities intermediaries.

“In applying the Howey test in its determination that Kraken must register, the SEC is simply following its Congressional mandate.”

Additionally, they asserted that the organization is not exceeding its authority and that there is no necessity to “enact unique laws for every emerging technology.”

Kraken’s reply to the SEC’s petition revolves around applying the Howey test to interpret the SEC’s jurisdiction.

This evaluates an investment’s classification as a security according to four primary standards:

• Monetary investment
• Expectation of profits
• Participation in a joint enterprise
• Dependence on the efforts of others

The attorneys for Kraken argued against:

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

Kraken argues that the SEC’s interpretation could significantly alter the financial regulatory environment by unduly expanding its jurisdiction beyond its original intent. They declared:

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

Controversy Regarding SEC Hammering Crypto

Kraken is among many industry leaders in cryptocurrencies disputed with the SEC. Robinhood, Coinbase, Uniswap, and Metamask have also been subject to regulatory action.

Even with the lack of advancements in specific cases, the SEC persists in contesting prominent entities within the industry.

Like Kraken, Coinbase was involved in a dispute with the SEC in 2023, when the federal agency charged the cryptocurrency exchange with selling unregistered securities.

Coinbase’s legal counsel had petitioned District Court Judge Katherine Polk Failla to ascertain whether the subject matter exceeds the agency’s delegated authority.

Ahead of a January hearing, Failla opposed Coinbase’s motion to limit the regulatory scope of the SEC.

Nevertheless, Judge Failla stayed the proceedings, raising doubts regarding the SEC’s assertions of excessive authority. She declared:

“I worry that I would be doing exactly the thing you’re alleging the Commission is doing here, which is to take power that I don’t have to stop activity I shouldn’t be stopping.”

The Cryptocurrency Community Supports Kraken Against the SEC

Numerous figures have spoken out in response to the ongoing assault on the cryptocurrency space, claiming that the SEC’s anti-crypto agenda is an effort to expel cryptocurrencies from the United States.

One of Ethereum’s co-founders, Joseph Lubin expressed his disapproval of the SEC’s approach. Lubin claimed that the SEC had chosen strategic enforcement actions rather than encouraging open discourse and establishing transparent regulatory guidelines.

As a result of this regulatory uncertainty, the cryptocurrency industry is uneasy, and US investors are now hesitant to enter the space. Lubin remarked:

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

The SEC was the subject of litigation initiated in February 2024 by the Crypto and Financial Technology Advocacy Group (CFAT), which comprises notable entities such as Ledger, Coinbase, and Paradigm.

There were assertions: “The SEC’s innovative effort to expand its regulatory authority to virtually all digital assets significantly exceeds the boundaries of its statutory jurisdiction.”

Additionally, CFAT argued that the SEC’s enforcement-based approach to regulation has impeded the innovation of cryptocurrencies. The SEC, they assert, has:

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

Therefore, Kraken’s stance on the subject advocated for its eradication. To continue operations, the SEC must reevaluate the existing legal framework in the United States, notwithstanding the cessation of its abuse of authority.