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Kraken warns SEC lawsuit sets dangerous precedent for overreach



Kraken argued that the SEC’s lawsuit against it would give the agency too much authority and that there is no defined scope to its claims.

The Crypto exchange has filed to dismiss a November lawsuit from the SEC, arguing that it sets a dangerous precedent for the agency’s oversight.

On Feb. 22, Kraken filed a motion to dismiss the case in a San Francisco federal court. At the same time, it published a blog post, stating:

The SEC’s theory is that there can be an investment contract with no contract, no post-sale obligations, and no interaction at all between the issuer and the purchaser.”

The theory means it “has no limiting principle” and would grant the SEC “boundless authority over commerce and potentially open up the floodgates to private securities law claims,” it argued.

It would turn a broad range of ordinary assets or commodities, like sports memorabilia, trading cards, expensive watches, or even diamonds, into securities, added the firm.

The SEC alleges that Kraken made millions from trading unregistered crypto securities, and did so without having registered as a broker, dealer, or clearing agency.

The SEC claimed that Kraken had inadequate controls to prevent customer funds from being commingled with business funds, with customer funds worth $33 billion impacted.

The exchange argued that the SEC did not provide proof that cryptocurrencies traded on the platform are “investment contracts” under U.S. securities law, as Kraken users do not have agreements with the issuers of those cryptocurrencies.

“Kraken customers did not invest money in an enterprise. Kraken customers participated in no common enterprise with issuers. And Kraken customers could not reasonably expect profits from the efforts of issuers,” it argued.

According to Kraken, the SEC’s definition of security would give it the power to regulate the sale of any asset that has any speculative purpose, including comic books and baseball cards. Kraken claims that the U.S. securities laws do not give the SEC such sweeping authority.

Kraken believes that the case should be dismissed due to the major questions doctrine, a legal principle established by the U.S. Supreme Court which states that Congress is responsible for passing laws, rather than granting regulatory agencies broad powers to interpret the law.

Kraken is not the only crypto firm to cite the major questions doctrine in an attempt to dismiss a lawsuit from the SEC. Other firms, including Binance, Coinbase, and Terraform Labs, have also used the doctrine to argue for dismissal.

The U.S. Congress is currently discussing how to regulate the crypto industry, and several bills are in the process of being drafted.

Last May, Kraken told Congress that current laws are not sufficient and a new regulatory framework should be enacted, with a more limited role for the SEC and a greater role for the CFTC in regulating exchanges.

“The very next day, the SEC called Kraken to say it was going to sue,” the exchange said in its latest filing. “And this Complaint followed.”


Read also: Ethereum Foundation alongside zkSync allocates $900K for ZK Layer 2 development


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