Kraken, a crypto exchange, said the US Securities and Exchange Commission’s lawsuit against them doesn’t claim fraud. In their view, the SEC is expanding the meaning of a contract. According to Kraken, the cryptocurrencies in question should be treated like commodities, not securities.
SEC vs. Kraken
Last November, the SEC took legal action against Kraken, claiming that the company didn’t register properly as a broker, clearinghouse, or exchange. They also said Kraken mixed up customer and company money. This happened after Kraken had already resolved issues related to its previous staking service.
“The SEC does not allege fraud. The SEC does not allege consumer harm. The SEC’s sole claims are that Kraken has somehow operated in plain sight for almost a decade as an unregistered securities exchange, broker-dealer, and clearing agency, in violation of the Exchange Act,” the motion said.
Kraken explained in an accompanying blog post, “The SEC believes that there can be an investment deal without any formal agreement, ongoing responsibilities, or communication between the seller and the buyer.”
The aforementioned theory means it “has no limiting principle” and gives the SEC “boundless authority over commerce and potentially open up the floodgates to private securities law claims,” they said.
“It would turn a broad range of ordinary assets or commodities, like sports memorabilia, trading cards, expensive watches, or even diamonds, into securities,” they further added.
What does the motion say?
Kraken’s motion also mentions that while things like comic books or baseball cards can be considered investments, they’re not the same as investment contracts. According to the motion, the SEC hasn’t convincingly shown that any of the cryptocurrencies they mentioned are actually securities or investment contracts. Kraken argued that the SEC didn’t follow the rules of the Howey Test, which is a guideline from the Supreme Court to determine if something is a security.
“The SEC tries to end-run the absence of any purchaser-issuer relationship creating a reasonable expectation of profits based on the efforts of the issuer.”
” It attempts to do so by alleging that the issuers made ongoing public statements advertising their tokens and improvements of the underlying technology platforms, which Kraken customers allegedly relied on for an expectation of profits based on their efforts,” Kraken said. Bitcoin and Ether, which have derivative products available for trading, were compared in the SEC’s complaint.