Kraken, a prominent cryptocurrency exchange, has formally requested the dismissal of a lawsuit brought against it by the U.S. Securities and Exchange Commission (SEC). The SEC’s lawsuit, filed in November, accuses Kraken of functioning without proper registration as an exchange, broker, and clearinghouse. However, Kraken counters this by arguing that the cryptocurrencies in question should be considered commodities rather than securities, challenging the SEC’s legal basis for the lawsuit.
Arguments for Dismissal
In its motion to dismiss, presented to the Northern District of California, Kraken emphasized that the SEC’s lawsuit extends the definition of a contract beyond reasonable boundaries. The exchange highlights that the SEC did not accuse it of fraud or causing consumer harm. Instead, the SEC’s allegations focus solely on Kraken’s supposed operation as an unregistered securities exchange, broker-dealer, and clearing agency for nearly a decade, actions deemed in violation of the Exchange Act.
Kraken’s defense draws parallels between cryptocurrencies and items like comic books or baseball cards, which, while possibly considered investments, do not constitute investment contracts. The exchange argues that the SEC has failed to convincingly demonstrate that the cryptocurrencies listed in the complaint are securities or investment contracts, referencing the Howey Test—a Supreme Court precedent that defines what constitutes a security.
Challenging the SEC’s Approach
Kraken criticizes the SEC’s attempt to establish a relationship between purchasers and issuers that would create an expectation of profits based on the efforts of the issuer. The exchange points out the SEC’s reliance on issuers’ public statements and technological improvements as insufficient for establishing an expectation of profits. By likening the involved cryptocurrencies to bitcoin and ether, which have derivatives products trading, Kraken further challenges the SEC’s classification.
Unaddressed Allegations
Notably, Kraken’s motion does not tackle the SEC’s allegations regarding the commingling of customer and corporate funds. The SEC had pointed to this commingling as behavior that would not be permissible for registered entities, implying a violation of regulatory standards.
Kraken’s request to dismiss the SEC lawsuit reflects the ongoing tension between the cryptocurrency industry and regulatory bodies. As the legal battle unfolds, it underscores the broader debate over the classification of digital assets and the regulatory framework that should govern the rapidly evolving crypto sector.
