Kraken Asks Court to Dismiss SEC Claims to Avoid ‘Significant Reordering’ of U.S. Financial Structure

As a researcher with a background in financial regulation and cryptocurrencies, I find Kraken’s latest move in its ongoing legal battle against the SEC an intriguing development. The company’s argument that the SEC lacks jurisdiction over the cryptocurrencies it lists because they should be treated as commodities rather than securities is a significant one, and could have far-reaching implications for the crypto industry as a whole.

In a filing submitted to the Northern District of California on Thursday, Kraken Crypto Exchange has asked the court to dismiss the charges leveled against it by the SEC (Securities and Exchange Commission). The exchange argues that complying with the SEC’s claims would result in a substantial shift in the U.S. financial regulatory framework.

Last November, the SEC first filed a lawsuit against Kraken, accusing the company of failing to register as a broker, clearinghouse, or exchange. This action came several months after Kraken had resolved similar charges concerning its previous staking service.

In February 2024, the crypto firm responded to the SEC’s legal action by contending that certain cryptocurrencies mentioned in the lawsuit, as per CoinDesk’s earlier report, should be categorized as commodities rather than securities.

Last month, the SEC submitted a 39-page response opposing Kraken’s motion to dismiss. In this document, they argued that “it is a misconception that this regulatory action surpasses the powers bestowed upon the SEC by Congress.”

The Securities and Exchange Commission (SEC) was established by Congress to ensure compliance with the Securities Act and Exchange Act. One of its responsibilities is overseeing securities intermediaries by requiring them to register with the SEC. In evaluating whether Kraken needs to register based on the Howey test, the SEC is just carrying out its legislative mandate.

We maintain that we are not seizing new authorities without precedent, and it is not necessary for Congress to pass specialized legislation for every emerging technology. Instead, our existing mandate allows us to adapt and apply the principles of securities law in a technology-neutral manner.

Kraken’s response to the SEC’s attempt to throw out the case relies on the interpretation of the SEC’s authority based on the Howey test. This test identifies investments as securities when certain conditions are met: an investment involves capital, it is part of a collective enterprise, there’s an expectation of profit, and the profits depend on others’ efforts.

According to Kraken’s legal argument, the Securities and Exchange Commission (SEC) fails to meet Howey’s extra conditions: investments requiring money in a shared enterprise with anticipated profits resulting from others’ efforts. This interpretation could broaden SEC’s authority excessively over various investment activities outside their original mandate. Such a substantial change in U.S. financial regulation merits Congressional debate rather than court rulings.

Judge William H. Orrick is scheduled to hear the matter on June 12.

Nikhilesh De contributed to this report.