SEC Overstepped Bounds in Kraken Lawsuit, State AGs Charge

A group of state attorneys general are arguing that the U.S. Securities and Exchange Commission exceeded its authority in suing the crypto exchange Kraken.

State law enforcement officials from Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota and Texas filed a joint amicus brief – or friend of the court filing – in the SEC's suit against Kraken on Thursday, alongside a number of industry lobbyists and other participants.

Saying the SEC's suit might even harm consumers, the state AGs argued that the agency was expanding the definition of an "investment contract," and that cryptocurrencies "are not automatically securities."

The filing, which echoed some of Kraken's own arguments – as well as other crypto companies – said the states were not filing in support of the exchange, but rather in opposition to the federal regulator.

"States have a strong interest in preventing the potential preemption of consumer protection and other state laws by the SEC’s attempt to regulate crypto assets as securities," the filing said. "... The SEC’s exercise of this undelegated authority puts consumers at risk by potentially preempting state statutes better tailored to the specific risks of non-securities products. Some state laws are more protective of consumers than the federal securities laws."

State cases have helped clarify the definition of investment contracts in the past, the filing said.

If the SEC wins its suit, it might be able to preempt state consumer protection laws, as well as state regulations around crypto, the filing said.

The SEC sued Kraken last fall, alleging the exchange had failed to register as a securities broker, clearinghouse or trading platform. It's a similar complaint the SEC has brought against companies like Coinbase, Binance and Bittrex's U.S. branch. While Bittrex settled, the Coinbase and Binance/Binance.US suits are ongoing.

Unlike those other suits, the SEC argued that Kraken was explicitly involved in touting 11 different digital assets it said the exchange listed as unregistered securities. The SEC also alleged Kraken commingled customer and corporate funds.

Kraken filed a motion to dismiss last week, arguing the SEC had failed to "plausibly allege" its arguments, and that it was overreaching its bounds – similar arguments to those made by Coinbase and Binance.

The case saw a flurry of amicus briefs on Wednesday and Thursday from industry groups like the Chamber of Digital Commerce, the Blockchain Association and the DeFi Education Fund.

U.S. Senator Cynthia Lummis (R-Wyo.) also filed a brief, similar to the one her office filed in the SEC's case against Coinbase.