Kraken says SEC lawsuit overhauls US financial regulation

Cryptocurrency exchange Kraken is pushing for a U.S. court to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC), arguing that the suit could lead to an undue expansion of the regulatory body’s authority over the crypto industry.

The SEC’s lawsuit against Kraken started last November and accuses the exchange of operating without proper registrations as a broker, clearinghouse, or exchange. The legal action follows a settlement earlier in the year about Kraken’s staking services, where similar registration issues were raised.

In a recent court filing, Kraken refuted the SEC’s claims by arguing that the cryptocurrencies listed in the SEC’s complaint should be classified as commodities rather than securities. This classification would exempt them from certain regulatory requirements under the SEC’s jurisdiction. Kraken’s defense hinges on the application of the Howey test, which is used to determine whether certain transactions qualify as investment contracts and therefore constitute securities under U.S. law.

The Howey test checks for four key criteria: an investment of money, in a common enterprise, with an expectation of profit predominantly from the efforts of others. Kraken’s legal team argues that these criteria are not met in this case, adding that, “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.”

For its part, the SEC defended its authority, stating, “It is simply not the case that this enforcement action exceeds the authority Congress granted the SEC.” The agency explains that its actions are consistent with its Congressional mandate to enforce the Securities Act and Exchange Act.

Kraken’s latest filing criticizes the SEC’s broad interpretation of its powers, suggesting that expanding the SEC’s jurisdiction in such a way would “gut Howey by significantly expanding the SEC’s jurisdiction to a host of investment activities that were never delegated to the agency.” Kraken argues that any major changes to the U.S.’s financial regulatory structure should be determined by Congress rather than through court decisions.