Kraken Fights SEC Jurisdiction, Seeks Dismissal in Landmark Crypto Case

Crypto exchange Kraken has sought the dismissal of the claims brought against it by the U.S. Securities and Exchange Commission (SEC) in a court filing on Thursday in the Northern District of California as a way to head off what it called a "drastic reordering" of the U.S. financial regulatory structure.

The SEC first sued Kraken in late November, alleging the company had failed to register as a broker, clearinghouse, or exchange. That move came months after the agency settled similar charges over Kraken's now-shuttered former staking service. Months later, in February 2024, the crypto company moved to kick out the SEC's lawsuit on the grounds that cryptocurrencies, at least as described in the SEC's complaint, should be treated as commodities, not securities, CoinDesk reported earlier.

And last month, the agency filed a 39-page opposition to Kraken's motion to dismiss in which the SEC said, "it is simply not the case that this enforcement action exceeds the authority Congress granted the SEC." "The SEC was created by Congress to enforce the Securities Act and Exchange Act, including the requirement that securities intermediaries register with the SEC," the filing from April said. "In its application of the Howey test in its determination that Kraken must register, the SEC is simply following its Congressional mandate."

Further, the SEC argued that it is not "assuming new powers," and Congress need not "enact bespoke laws to each new technology that emerges." Kraken's latest response to the SEC's motion to dismiss seems to hinge on how far it's possible to read the SEC's jurisdiction by applying the Howey test, which determines what is and what is not a security. This is done by applying tests to determine whether an investment is made in the following four cases: an investment of capital, in a common enterprise, with an expectation of profit, driven by the efforts of others.

"The SEC cannot satisfy Howey's additional requirements that there be investments of money in a common enterprise with a reasonable expectation of profits based on the efforts of others," wrote the lawyers at Kraken. "This would gut Howey by significantly expanding the SEC's jurisdiction to a host of investment activities that were never delegated to the agency. Such a significant reordering of the U.S.'s financial regulatory structure should be debated in Congress, not in the courts." Judge William H. Orrick is scheduled to hear the matter on June 12.