Kraken counters SEC’s legal interpretation in dismissal motion

In its legal defense against a lawsuit from the United States Securities and Exchange Commission (SEC), Kraken has filed a reply refuting the agency’s allegations of trading unregistered securities, arguing that the case lacks precision and misinterprets fundamental legal concepts.

In its response filing, Kraken identifies discrepancies in the SEC’s argument, noting the agency’s failure to accurately identify investment contracts traded on the exchange.

Additionally, Kraken argues that the SEC’s use of terms like “investment concept” and “ecosystem” instead of “investment contract” and “enterprise” reflects a misunderstanding of the case’s legal framework.

The SEC initially sued Kraken in November 2023, alleging it unlawfully made millions of dollars from “crypto asset securities” transactions and provided “exchange, broker, dealer, and clearing agency” services without having registered with the agency “as required by law.” This was months after settling charges over Kraken’s former staking service.

Kraken’s reply to the SEC in support of the motion to dismiss. Source: CourtListener

However, Kraken filed a motion to dismiss, contending that it establishes a “dangerous precedent” for the agency’s jurisdiction. In response, the SEC filed a 39-page opposition to Kraken’s motion to dismiss, saying, “It is simply not the case that this enforcement action exceeds the authority Congress granted the SEC.”

In the Thursday, May 9 motion, Kraken contests the SEC’s claim that written contracts are required in investment agreements, emphasizing that contracts can be oral, expressed or implied.

Kraken argues that the SEC’s efforts to refute unaddressed arguments indicate a misunderstanding of the case’s central points.

Related: SEC has taken ‘too expansive’ a view of crypto, says former commissioner

Kraken references past SEC cases involving initial coin offerings to support its stance. The exchange emphasized that these cases centered on contractual rights and obligations, supporting Kraken’s view of investment contracts.

Kraken’s motion hinges on interpreting the SEC’s jurisdiction using the Howey test, which defines a security based on specific criteria, such as the investment of capital in a common enterprise with the expectation of profit, driven by the efforts of others.

The U.S. Congress is currently deliberating on crypto regulation with several ongoing bills. Concurrently, eight state attorneys general in the U.S. have filed a joint amicus brief, contending that the SEC exceeded its delegated authority in the lawsuit against the cryptocurrency exchange Kraken.

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