Kraken Challenges SEC Lawsuit as a ‘Dangerous Precedent’

The cryptocurrency exchange Kraken has filed a motion to dismiss a lawsuit by the SEC, arguing that the case could set a “dangerous precedent” for the regulator’s authority.

In November 2023, the Commission accused the company of offering unregistered securities in the form of digital tokens on its platform. 

The agency also alleged that Kraken engaged in illegal activities as an exchange, broker, dealer, and clearing agency. Other claims involved non-compliant business practices such as commingling client and corporate funds.

The company’s lawyers stated that the court should dismiss the SEC’s lawsuit for two main reasons:

• the regulator cannot reasonably assert that digital tokens were investment contracts when traded on Kraken;
• the agency is extending its authority over a significant part of the economy without clear congressional authorization.

In a blog post, the company clarified that even if the Commission’s claims were hypothetically true, they are legally flawed. According to the Howey Test, an investment contract requires “an investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others.” The SEC found nothing of the sort in Kraken’s case, the company asserts. 

(7/10) Instead of identifying securities, the complaint asks the court to endorse a theory that there can be an investment contract without any contract, without any post-sale obligations or even any interaction at all between the issuer and the purchaser.

— Dave Ripley (@DavidLRipley) February 23, 2024

“Instead of identifying securities, the complaint asks the court to endorse a theory that there can be an investment contract without any contract, without any post-sale obligations or even any interaction between the issuer and the purchaser,” wrote Kraken CEO Dave Ripley.

The company believes the court should not support such a regulatory approach, as it “lacks limiting principles.”

“This would give the SEC limitless power over trading—from collectibles like sports memorabilia, trading cards, expensive watches, to commodities like diamonds,” Ripley continued.    

The lawyers argue that even considering the lawsuit “creates a dangerous precedent.” They emphasized that until 2023, the Commission acknowledged it lacked the authority to regulate the crypto industry. However, the agency then “discovered it had nearly unlimited discretion to find ‘securities’ even where it contradicts decades of case law,” leading to a series of lawsuits. 

“The SEC should not be allowed to expand its own jurisdiction—this is the prerogative of Congress,” they concluded.

Since March 2023, the agency has initiated civil proceedings against Beaxy, Bittrex, Binance, and Coinbase.