State attorneys general argue SEC overstepped in Kraken lawsuit

Attorneys general from numerous states filed a brief that calls out the SEC for its enforcement action against the Kraken crypto exchange, saying it used “undelegated authority.”

Eight state attorneys general in the United States filed a joint amicus brief which argues that the Securities and Exchange Commission (SEC) has overstepped its delegated power in the lawsuit against the cryptocurrency exchange Kraken.

The brief was filed on Feb. 29 by officials from Arkansas, Iowa, Mississippi, Montana, Nebraska, Ohio, South Dakota and Texas, along with other participants including industry lobbyists.

According to the filing, state officials said that it is not in support of either of the parties, rather it “opposes the SECs regulation of crypto assets absent an investment contract because Congress has not delegated this authority to the SEC.”

The attorneys general posed the argument that the SEC was expanding what is defined as an “investment contract” and that states are in the position to prevent possible overstepping of state laws, including consumer protection laws, that could be breached by the SEC attempting to regulate crypto assets as securities. They said:

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

“The SECs enforcement action exceeds its delegated powers,” the brief stated. “Some state laws are more protective of consumers than the federal securities laws,” they added.

This follows a motion filed by Kraken on Feb. 22 in which it asked to dismiss the lawsuit with the SEC entirely under similar claims of “dangerous precedent” of overreach by the regulator.

Kraken argued that the SEC has “no limiting principle” and this lawsuit, if given favor to the SEC, would give the agency too broad of authority. Kraken said it also gives the agency too wide of an authority, the crypto exchange argues.

The cryptocurrency exchange released a blog post the same day, stating that the SECs claim is flawed in its argument that Kraken operates an unlicensed securities exchange, broker, dealer and clearing agency, calling crypto tokens “investment contracts” without pointing to any actual “contracts” between customers and the exchange.

In November, the SEC filed its lawsuit against Kraken alleging it was operating while unregistered, was commingling client funds and was failing to prevent conflicts of interest.

The SEC has brought similar complaints against other crypto-related firms, such as Coinbase, Binance and the U.S. branch of Bittrex, with the first two still ongoing cases.