SEC overstepped bounds in Kraken lawsuit, US state attorneys say

A group of eight U.S. state attorneys general claims the Securities and Exchange Commission (SEC) exceeded its authority in its case against cryptocurrency exchange Kraken.

In a joint statement on Feb. 29, the attorneys general from Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas said they did not support either side but opposed SEC regulation.

Moreover, attorneys argue that states are interested in preventing the potential preemption of consumer protection laws and other state laws due to the SEC’s attempt to regulate crypto assets as securities.

“The court should reject categorizing crypto assets as securities absent an investment contract. The SEC’s exercise of this undelegated authority puts state consumers at risk by preempting state statutes better tailored to the specific risks of non-securities products.”

State attorneys statement

The prosecutors’ comment came shortly after Kraken filed a motion to dismiss the SEC’s lawsuit because it could set a “dangerous precedent” for the regulator’s powers. The company clarified that even if the Commission’s statements are theoretically accepted as accurate, they are erroneous as a matter of law.

In November 2023, the Commission accused Kraken of offering unregistered securities in the form of tokens on its platform. The department also stated that Kraken carried out illegal activities as an exchange, broker, dealer, and clearing agency. Other complaints related to inappropriate business practices, such as mixing client and corporate funds.

The SEC considers all cryptocurrencies except Bitcoin (BTC) to be secure based on the Howey Test. The Howey Test is a list of criteria that help determine whether an asset has security characteristics and constitutes an “investment contract.” However, many crypto community members are confident that this scheme cannot be applied to blockchain assets.