By
Steve Muchoki
April 26th, 2024
Kraken criticized the SEC’s interpretation of investment contracts, calling it into question for its potential impact on the broader market.
In recent developments, popular cryptocurrency exchange Kraken has made a bold move to challenge the Securities and Exchange Commission’s (SEC) lawsuit against it in November 2023, following the footsteps of Binance and Coinbase.
On Thursday, the exchange filed a motion in a federal court in San Francisco seeking to dismiss the lawsuit, which accused the company of violating securities rules, including operating an unregistered exchange, failing to prevent conflicts of interest, and commingling customer funds.
Kraken Challenges SEC’s Interpretation of Investment Contracts
In a blog post accompanying the motion, Kraken argued that the SEC’s claim lacked merit. The financial regulator had alleged that Kraken operated an unlicensed platform for “investment contracts” without specifying any actual contract between Kraken users and token issuers.
In its defense, Kraken said that none of the assets mentioned in the SEC’s complaint qualified as investment contracts under the law.
The exchange stressed that both the US Supreme Court and the Ninth Circuit, where the case was filed, had consistently required the market watchdog to identify a contract when asserting the existence of an investment contract.
Furthermore, Kraken argued that crypto offerings do not meet the criteria for the Howey test, a standard often used by US authorities to determine if sales of securities qualify as “investment contracts”.
The exchange also criticized the SEC’s interpretation of investment contracts, calling it into question for its potential impact on the broader market. The SEC’s theory, as highlighted by Kraken, suggests that an investment contract could be deemed valid even without the traditional elements of a contract. These elements typically include a formal agreement, obligations after the sale, and ongoing interaction between the issuer and the purchaser.
“The SEC’s theory is that there can be an investment contract with no contract, no post-sale obligations, and no interaction at all between the issuer and the purchaser,” reads the blog post.
The exchange argued that the SEC’s interpretation lacks a clear boundary or “limiting principle”, which could grant the authorities excessive power over commerce. Kraken said such an interpretation could potentially lead to a scenario where a wide range of ordinary assets or commodities, like sports memorabilia, trading cards, luxury watches, or even diamonds, could be classified as securities.
A Dangerous Precedent for Regulatory Overreach
The exchange also defended itself against accusations of fraud or misconduct towards customers, challenging the legal basis of the SEC’s claim. The company warned that allowing the SEC to proceed with its claim could set a dangerous precedent for regulatory overreach.
Kraken’s CEO, Dave Ripley, went further on a thread on X (formerly Twitter), suggesting that the SEC’s actions were politically motivated. Ripley pointed out that the lawsuit came shortly after Kraken testified about the SEC’s “overreach in crypto” at congressional hearings on May 10, 2023.
(4/10) The next day, the SEC called Kraken to say it was going to sue.
— Dave Ripley (@DavidLRipley) February 23, 2024
He emphasized that US crypto innovators should not face retaliation for their political speech and that regulatory actions should be constructive rather than punitive.
The Kraken CEO also mentioned that the SEC’s lawsuit was timed to intimidate those who would question the SEC’s jurisdiction, noting that the suit failed to allege any securities were traded in Kraken, illegally or otherwise.
