Kraken Challenges SEC Lawsuit Seeking Dismissal

Kraken, a prominent cryptocurrency exchange, has taken legal steps to challenge a lawsuit brought against it by the U.S. Securities and Exchange Commission (SEC), seeking to have the case dismissed. The SEC initiated legal action against Kraken in November of the previous year, accusing the exchange of functioning without the necessary registration as an exchange, broker, and clearinghouse.

Kraken filed a motion in the Northern District of California, contesting the SEC’s allegations and arguing for the dismissal of the lawsuit.

In its defense, Kraken contended that the cryptocurrencies mentioned in the SEC’s lawsuit are more akin to commodities rather than securities, thus not falling under the regulatory purview of the SEC as claimed. The exchange highlighted that the SEC’s lawsuit stretches the definition of a contract too far and unjustly labels cryptocurrencies as securities.

Kraken’s filing strongly refuted the SEC’s claims, pointing out that the commission did not accuse the exchange of any fraudulent activities or causing harm to consumers. Instead, the SEC’s complaint centers on the claim that Kraken has been operating as an unregistered securities exchange, broker-dealer, and clearing agency for nearly a decade, contrary to the stipulations of the Exchange Act.

Furthermore, Kraken’s motion to dismiss leveraged arguments from other ongoing legal cases, asserting that while comic books or baseball cards can be considered investments, they do not constitute investment contracts. The exchange emphasized that the SEC failed to convincingly argue that the cryptocurrencies in question should be classified as securities or investment contracts, as defined by the legal standards.

A key point in Kraken’s argument against the SEC’s allegations is the Howey Test—a Supreme Court precedent that outlines criteria for identifying securities. Kraken argued that the SEC’s complaint lacks a basis since it does not demonstrate a purchaser-issuer relationship that would create a reasonable expectation of profits derived from the efforts of the issuer.

Kraken also criticized the SEC’s approach, suggesting that the commission is attempting to circumvent the lack of a direct relationship between purchasers and issuers by alleging issuers’ public statements about their tokens and technological improvements as a basis for profit expectations among Kraken’s customers.