The Real Story of the SEC’s Lawsuit Against Kraken and Why Kraken Wants to Dismiss the Lawsuit

On the morning of May 10, 2023, Kraken testified before the House Financial Services Committee and the House Agriculture Committee about the SEC’s cryptocurrency glut.

Kraken testified that current laws do not adequately address the digital asset industry and that Congress could do more to enact a set of rules to better protect consumers and investors.

Kraken testified on its new set of cryptocurrency exchange rules: Congress should limit the SEC’s jurisdiction in favor of other agencies.. The next day, the SEC called Kraken and said they would file a lawsuit.

Cryptocurrency innovators in the United States need not fear retaliation for political speech. They should be free to seriously advocate for better laws and more efficient markets. They must be free from the threat of politically compromised institutions.

Likewise, U.S. cryptocurrency users should enjoy a full suite of consumer protections put in place by their elected representatives in Congress. This should be the focus of carefully tailored rules that take into account both the risks and risk mitigation factors inherent to digital asset systems. They should not be held hostage to institutional power struggles.

Today we filed a motion asking the court to dismiss the SEC’s lawsuit against Kraken. The SEC’s complaint does not allege any fraud or harm to consumers. Because cryptocurrency tokens are so-called “investment contracts,” Kraken only made registration-based claims that it operates as an unlicensed stock exchange, broker, dealer and clearing agent. Even if you accept all of the SEC’s claims in the complaint as true (many of them do not), they are legally flawed.

The SEC never refers to an “agreement” between Kraken buyers and token issuers, so there can be no “investment agreement.”

None of the assets the SEC sued are investment contracts under the law.

For 80 years, the U.S. Supreme Court and the Ninth Circuit (where this case was brought) have always ruled that the SEC contract When discovering the existence of an investment contract.

The SEC will not take this action in its case against Kraken. Instead, the court is asked to approve a new theory. Anything that can increase in value in the “ecosystem” can become an investment contract.

With no precedent to defend against this self-serving attempt to expand its jurisdiction, the SEC relies instead on ambiguity and contradiction.

For example, in its complaint, the SEC uses a new term of its own: “digital asset security.” They argue that digital assets are securities in their own right, but acknowledge that digital assets are not contracts, but just computer code.

The SEC also stated that Bitcoin and Ethereum are not securities. Even though the SEC’s “ecosystem” theory applies to the same assets at issue in the complaint. Finally, the SEC Chairman told Congress that the SEC does not have the authority to regulate cryptocurrency exchanges, but the lawsuit now claims it does. We ask the court to deny the SEC’s appeal for these reasons.

Digital assets do not meet Howey requirements.

We also ask the court to dismiss the complaint because not only was there no contract, but there was no contract. invest contract. At the now famous Supreme Court down According to the decision, the investment contract requires 1) an investment of money, 2) an investment in a general enterprise, and 3) the investor reasonably expects to benefit from the efforts of others.

The SEC does not allege that this occurred on Kraken’s exchange. The complaint does not include, for example, an allegation that the buyer’s money was pooled or otherwise entrusted to a specific entity. Nor is it asserted that there were any benefits that could reasonably be expected from the joint venture beyond those generated by market fluctuations.

Allowing this case to continue sets a dangerous precedent for institutional overreach.

The SEC’s theory is that there can be investment contracts with no contracts, no post-sale obligations, and absolutely no interaction between the issuer and buyer. There is no joint venture, there is no joint venture, there is no profit in the business.

down It’s never been applied this way, and for good reason. The theory has no limiting principles. This would give the SEC unlimited authority over commerce and potentially open the floodgates to private securities law claims. A wide range of common assets or commodities can be converted into securities, such as sports memorabilia, trading cards, expensive watches, and even diamonds.

The SEC did not assert this authority over the U.S. economy until last year to support lawsuits against the cryptocurrency industry. Only now, 90 years after the Securities Exchange Act of 1934 was enacted, has the SEC discovered that it has nearly unlimited discretion in finding “securities” even when it runs counter to decades of case law.

The SEC should not be allowed to expand its jurisdiction. That’s the council’s decision.

The SEC’s attempt to seize jurisdiction over the trillion-dollar digital asset industry—potentially applicable to all areas of commercial and broader commodity markets—is grounds for dismissal under the leading question doctrine.

It raises serious issues about abuse of power. This principle is designed to prevent agencies from “discovering” broad regulatory authority without a clear delegation from Congress. That’s what the SEC is doing here.

Kraken helps build consistent rules for this industry. Everyone – issuers like Kraken, buyers, and exchanges – can benefit from having clear guidelines. Kraken continues to advocate for this.

But the SEC is moving in the wrong direction. The theories in the lawsuit are inconsistent. We are committed to doing what we believe is right for our customers and our community of innovators. Our mission to accelerate cryptocurrency adoption so that everyone can achieve financial freedom and inclusion is at the core of everything we do.

So today we ask the court to dismiss this case and return legislative power to Congress where it belongs.

These materials are provided for general information purposes only and are not investment advice, a recommendation, or a solicitation to buy, sell, stake, or hold any cryptocurrency assets or to engage in any particular trading strategy. Kraken does not and will not seek to increase or decrease the price of any particular cryptocurrency asset. Some cryptocurrency products and markets are unregulated and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the cryptocurrency asset market may result in loss of funds. You may be subject to taxes on the appreciation and/or reporting of your cryptocurrency assets and you should seek independent advice regarding your tax position. Geographic restrictions may apply.