On February 22, Kraken filed a motion to dismiss the lawsuit in federal court in San Francisco. In an accompanying blog post, Kraken stated: “The SEC’s theory is that an investment contract can exist without a contract, without post-sale obligations, and without any interaction between issuer and buyer at all.” The theory means it has “no limiting principles” and would give the SEC “unlimited trading powers and potentially open the floodgates to private securities law lawsuits,” the report argues. “This will turn a wide range of common assets or commodities, such as sports memorabilia, trading cards, luxury watches or even diamonds, into securities,” the firm added.
Last year, the SEC sued Kraken, alleging that the company illegally made millions of dollars from transactions in “cryptoassets and securities” and provided “exchange, broker, dealer and clearing agency” services without registering with the agency “as required by law.” . The agency also accused Kraken of deficient internal controls that resulted in $33 billion of client assets being commingled with the business’s funds.
In its motion, Kraken said the SEC could not argue that exchange-traded cryptocurrencies constitute “investment contracts” under U.S. securities laws because there was no agreement between Kraken’s customers and the cryptocurrency issuers. The solicitation emphasizes that clients are not investing in the exchange, and their returns on their investments in issuer tokens are not promised or guaranteed. “Kraken’s customers did not invest money in the enterprise. Kraken’s customers did not engage in any joint ventures with the issuers. And Kraken’s customers could not reasonably expect to profit from the issuers’ efforts,” it states. The Exchange also states that “the SEC’s definition of a security may include the ‘securitization’ of any simple sale of assets for an intended speculative purpose, such as comic books and baseball cards,” and securities laws have “never given the SEC […] such enormous powers.” Kraken adds in the motion that the case should be dismissed due to the fundamental questions doctrine, a 2022 U.S. Supreme Court ruling that says Congress seeks to make laws rather than delegate power to regulators. Other crypto firms, including Binance, Coinbase and Terraform Labs, have invoked the doctrine in their attempts to defeat the SEC’s lawsuits.
The US Congress is debating how cryptocurrency should be regulated, and numerous bills to regulate the industry are in various stages of development. Meanwhile, many crypto firms are considering more friendly jurisdictions outside the US. Last May, a Kraken representative testified before a congressional hearing on cryptocurrency regulation, saying current laws were inadequate and that a framework needed to be adopted that limited the SEC’s powers and expanded the Commodity Futures Trading Commission’s powers to cover exchanges.
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