Gary Gensler is the Chairman of the Securities and Exchange Commission. Samuel Corum—Getty Images
Cryptocurrency exchange Kraken on Thursday filed a motion to dismiss a November lawsuit against the Securities and Exchange Commission that accused the U.S.-based company of failing to register with the Securities and Exchange Commission and adulterating customer funds. .
Kraken's response and accompanying blog post said the exchange echoed legal arguments advanced by competitors Binance and Coinbase in similar lawsuits, saying the enforcement action was retaliation for political speech. claims. Kraken received notice of the lawsuit one day after Chief Legal Officer Marco Santori testified before Congress about SEC overreach in May.
“U.S. crypto innovators need not fear retribution for political speech,” Kraken’s blog post said. “They should not be subject to intimidation by politically compromised government agencies.”
Founded in 2011, Kraken was one of the first crypto exchanges in the US, but it lags behind Coinbase and Binance in trading volume. (Co-founder Jesse Powell, an outspoken and often controversial spokesperson for the crypto industry, resigned in 2022 following media reports about conflicts with employees.)
After FTX's collapse in November 2022, Kraken was one of the first targets of a new SEC enforcement action. In February 2023, the company settled with regulators for $30 million over a staking feature offered to customers that the SEC said was an offering of unregistered securities. Kraken did not admit or deny the allegations as part of the deal, but the company agreed to end its staking program in the United States.
In November, the SEC filed a new lawsuit against Kraken, this time focusing on its cryptocurrency trading business. Similar to the lawsuits filed against Coinbase and Binance, the SEC alleged that Kraken operated as a traditional stock exchange, broker, dealer, and clearing house without registering with an agency.
In its complaint, the agency cited several crypto assets offered on the platform, alleging that they are securities including Solana, MATIC on the Polygon blockchain, and ADA on the Cardano blockchain.
The SEC also alleges that Kraken mixed up customer funds with its own funds, and named an independent auditor the exchange hired, given that the mixing of funds contributed significantly to FTX's demise. And this is a serious accusation. But unlike Sam Bankman Freed's ill-fated trade, Kraken was not charged by the SEC with misappropriating customer funds.
“Rules of this industry”
The SEC has long held that the majority of crypto assets are securities, citing the Howie Test, a Supreme Court precedent that describes securities as investments of money in ordinary businesses with the expectation of profit from the efforts of others. It has been argued that this applies. Cryptocurrency exchanges have countered that while subsequent case law requires that an actual contract exist, this is typically not the case when it comes to crypto trading.
“While the SEC has asked courts to adopt an open-ended doctrine, Kraken does not,” the company's lawyers wrote. They argue that investments in things that could increase in value through a broader “ecosystem” could also include collectibles such as trading cards and Beanie Babies, which are not subject to the SEC's jurisdiction. are doing.
Thursday's filing did not directly address the adulteration allegations. Rather, lawyers argue that the SEC is not alleging “fraud” or “consumer harm.”
An SEC spokesperson did not respond to a request for comment.
The Kraken lawsuit is pending in the U.S. District Court for the Northern District of California, the Binance lawsuit is pending in the District Court of Washington, D.C., while Coinbase and Terraform Labs are awaiting a ruling in the Southern District of New York. Yesterday, an aggressive lawsuit against the SEC was filed in federal court in Texas, which is considered a more friendly jurisdiction for anti-SEC actions.
All cases hinge on whether virtual currencies qualify as securities and fall under the jurisdiction of the SEC, and unless Congress passes new regulations, this issue will remain unresolved through the appellate process. In an election year, that seems increasingly unlikely.
“Kraken supports creating consistent rules for this industry,” the company said in a blog post Thursday. “But the SEC is going in the wrong direction.”
