Kraken Challenges SEC’s Legal Interpretation in Dismissal Motion

Cryptocurrency exchange Kraken is intensifying its legal battle with the United States Securities and Exchange Commission (SEC) by challenging the agency’s claims in court. In response to the SEC’s lawsuit alleging trading of unregistered securities, Kraken has filed a reply asserting discrepancies in the SEC’s arguments and a lack of specificity in identifying alleged wrongdoing.

The SEC initially sued Kraken in November 2023, accusing the exchange of operating without proper registration and engaging in unregistered securities trading. Kraken countered these allegations by filing a motion to dismiss, arguing that cryptocurrencies listed on its platform should be treated as commodities rather than securities.

In its legal defense, Kraken highlights the SEC’s failure to accurately identify investment contracts traded on the exchange. Kraken contends that the SEC’s use of terms like “investment concept” and “ecosystem” instead of “investment contract” and “enterprise” reflects a misunderstanding of the case’s legal framework.

Furthermore, Kraken argues that the SEC’s insistence on written contracts for investment agreements overlooks the possibility of oral or implied contracts. The exchange cites past SEC cases involving initial coin offerings to support its interpretation of investment contracts.

The central point of contention revolves around the Howey test, which determines whether an asset qualifies as a security based on specific criteria. Kraken emphasizes that the SEC’s jurisdiction should be limited to activities that meet the criteria outlined in the Howey test.

Kraken’s legal strategy also invokes the “major questions doctrine,” which requires clear congressional authorization for regulatory actions with significant national implications. By questioning the SEC’s authority to regulate cryptocurrencies without congressional approval, Kraken aims to challenge the agency’s interpretation of existing securities laws.

The SEC, however, maintains that it is acting within its congressional mandate to enforce securities regulations. The agency argues that cryptocurrencies fall within its jurisdiction and that new technologies do not require bespoke laws but can be regulated under existing frameworks.

As the legal battle between Kraken and the SEC unfolds, the outcome could have far-reaching implications for the cryptocurrency industry. The court’s decision on whether cryptocurrencies should be classified as securities or commodities will not only impact Kraken but also shape regulatory standards for other exchanges and market participants.

Judge William H. Orrick is scheduled to hear arguments from both parties on June 12, signaling a crucial juncture in the ongoing dispute. The court’s ruling will likely provide clarity on the regulatory status of cryptocurrencies and establish precedents for future enforcement actions by the SEC.