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Cryptocurrency News Articles
Kraken Rejects SEC's Classification of Crypto Assets, Contests Authority in Lawsuit
May 10, 2024 at 06:32 pm
Kraken contests the SEC's interpretation of the Howey Test and requests dismissal of the case against the exchange. Kraken's legal response asserts that the SEC's argument alleging an unregistered securities exchange is flawed, as it overextends the Howey Test criteria and misinterprets legal concepts. The exchange questions the SEC's jurisdiction and argues that the Commission's actions should be debated in Congress rather than in the courts.
Kraken Disputes SEC's Characterization of Digital Assets, Challenges Jurisdiction in Securities Exchange Lawsuit
In a resounding rebuttal to the Securities and Exchange Commission's (SEC) recent filing, legal representatives for Kraken have submitted a comprehensive response, vehemently contesting the agency's interpretation of the Howey Test and requesting the court's dismissal of the case against the cryptocurrency exchange.
Kraken's Argument: SEC Overstretching Jurisdiction
Kraken's attorneys assert that the SEC's lawsuit, alleging that the exchange has been operating as an unregistered securities exchange, is fundamentally flawed. They argue that the SEC's reliance on the Howey Test, a legal framework used to determine whether an asset qualifies as a security, is an unwarranted extension of the agency's jurisdiction.
The Howey Test stipulates that an investment involves the investment of money in a common enterprise, with the expectation of profits derived primarily from the efforts of others. Kraken's lawyers maintain that the SEC's interpretation of these criteria is overly broad and would significantly expand the agency's authority to regulate a wide range of investment activities that were never intended to be subject to its purview.
"The SEC cannot satisfy Howey's additional requirements that there be investments of money in a common enterprise with a reasonable expectation of profits based on the efforts of others," Kraken's attorneys stated. "This would gut Howey by significantly expanding the SEC's jurisdiction to a host of investment activities that were never delegated to the agency."
Kraken further argues that the SEC is improperly invoking the concepts of "ecosystem" and "investment concept" in place of the established legal terms "enterprise" and "investment contract."
SEC's Position: Enforcement Authority within Congressional Mandate
In April, the SEC filed an opposition to Kraken's motion to dismiss, asserting that its enforcement action falls well within its authority as granted by Congress. The agency argued that it was created to enforce the Securities Act and Exchange Act, which encompass the requirement that securities intermediaries register with the SEC.
The SEC also emphasized that it is not seeking to assume new powers but rather is utilizing its existing authority to regulate novel financial technologies.
Kraken's Alleged Violations
The SEC initially filed suit against Kraken in November 2022, accusing the exchange of operating as an unregistered securities exchange. The agency alleged that Kraken had earned hundreds of millions of dollars by facilitating the buying and selling of crypto asset securities since at least September 2018.
Specifically, the SEC named Polygon (MATIC), Solana (SOL), OMG Network (OMG), Decentraland (MANA), Algorand (ALGO), Filecoin (FIL), and Near (NEAR) as cryptocurrencies that it deemed to be securities.
The SEC further alleged that Kraken had commingled user funds and engaged in a range of unlawful business practices, including poor internal controls.
Kraken has vehemently denied these allegations and has accused the SEC of abandoning efforts to provide regulatory clarity while pursuing an aggressive enforcement-only approach.
Prior Enforcement Action Against Kraken
In February 2022, Kraken settled with the SEC for offering unregistered staking-as-a-service products to users in the United States. Under the terms of the settlement, Kraken permanently suspended the service and paid a $30 million fine.
At the time, SEC Chair Gary Gensler emphasized that companies offering investment contracts in exchange for tokens must adhere to securities laws and provide appropriate disclosures and safeguards.
The latest lawsuit against Kraken marks another significant escalation in the SEC's efforts to regulate the cryptocurrency industry. The agency has repeatedly asserted its authority over digital asset markets and has taken enforcement actions against a number of exchanges and other industry participants.
The outcome of the Kraken case will have far-reaching implications for the cryptocurrency industry and could potentially shape the regulatory landscape for years to come. The SEC's pursuit of this case signals its determination to assert its jurisdiction over digital asset markets, while Kraken's challenge highlights the ongoing debate over the appropriate regulatory framework for these novel financial technologies. As the case unfolds, industry stakeholders will be closely monitoring the legal arguments and court rulings, as they have the potential to significantly impact the future of the cryptocurrency ecosystem.
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