Crypto Clash: Kraken Challenges SEC’s Definition Of Securities

Crypto
exchange
Kraken
has
intensified
its
fight
against
the
US
Securities
and
Exchange
Commission
(SEC)
by
formally
submitting
a
reply
in
support
of
its
motion
to
dismiss
the
agency’s
lawsuit.
The

filing,
dated
May
9,
2024,
challenges
the

SEC’s
claim
that
Kraken
operated
as
an
unregistered
exchange
dealing
with
securities,
specifically
“investment
contracts.”

Led
by
Matthew
C.
Solomon
from
Cleary
Gottlieb
Steen
&
Hamilton
LLP,
Kraken’s
legal
team
disputes
the
SEC’s
allegations,
asserting
that
no
specific
investment
contracts
traded,
brokered,
or
settled
on
Kraken’s
platform
have
been
identified.
They
argue
that
crypto
assets
alone,
which
are
the
only
products
alleged
to
have
been
handled
by
Kraken,
do
not
meet
the
definition
of
investment
contracts
under
federal
securities
laws.

Kraken
Fights
For
The
Entire
Crypto
Industry

The
filing
emphasizes
a
critical
flaw
in
the
SEC’s
approach,
accusing
the
regulatory
body
of
conflating
primary
offerings
conducted
outside
of
Kraken
with
secondary
crypto
market
transactions
on
the
platform.
Kraken’s
attorneys
contend
that
the
SEC’s
approach
ignores
the
distinct
legal
treatment
required
for
primary
and
secondary
market
transactions
under
the
Securities
Act
of
1933
and
the
Securities
Exchange
Act
of
1934.

Kraken’s
submission
states,
“The
transactions
alleged
to
have
occurred
on
Kraken
are
blind
bid/ask
secondary
market
sales
of
digital
assets…
unaccompanied
by
any
contractual
terms
or
other
obligations
that
may
have
existed
at
the
initial
offering.”
This,
they
argue,
could
improperly
extend
the
SEC’s
regulatory
reach
to
virtually
any
digital
asset
or
commodity
by
asserting
an
associated
“investment
concept”
or
“ecosystem.”

Further
challenging
the
SEC’s
jurisdiction,
Kraken’s
lawyers
invoke
the
major
questions
doctrine,
arguing
that
the
expansive
interpretation
of
regulatory
authority
over
crypto
assets
should
be
explicitly
authorized
by
Congress,
not
determined
through
litigation.
They
maintain
that
the

Howey
Test’s
criteria
—
a
standard
used
to
define
what
constitutes
an
investment
contract
—
are
not
met,
as
there
was
no
investment
of
money
in
a
common
enterprise
with
a
reasonable
expectation
of
profits
predominantly
from
the
efforts
of
others.

The
SEC
initially
sued
Kraken
in
November,
after
previously
settling
charges
over
Kraken’s
staking
services.
In
its
opposition
filed
last
month,
the
SEC
defended
its
actions,
stating,
“it
is
simply
not
the
case
that
this
enforcement
action
exceeds
the
authority
Congress
granted
the
SEC.”
The
SEC
argued
that
its
enforcement
aligns
with
the
Howey
test
and
its

Congressional
mandate,
dismissing
claims
of
overreach.

Related
Reading:

Taiwan
Sets
Sights
On
Crypto
Firms
With
Tough
New
Jail
Time
Laws

The
court
is
scheduled
to
hear
arguments
on
the
motion
on
June
12,
2024.
If
Kraken’s
motion
to
dismiss
is
granted
by
Judge
William
H.
Orrick,
it
could
set
a
significant
legal
precedent
for
the
entire
crypto
industry,
potentially
limiting
the
SEC’s
ability
to
regulate

secondary
market
transactions
of
crypto
assets
under
the
current
legislative
framework.

At
press
time,
Bitcoin
traded
at
$63,237.

Featured
image
from
Koszary
Tradingu,
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from
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