State Attorneys General Question SEC’s Authority in Kraken Lawsuit

A group of state attorneys general has challenged the U.S. Securities and Exchange Commission’s (SEC) authority in the ongoing lawsuit against the cryptocurrency exchange Kraken.

On Thursday, state law enforcement officials from Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas filed a joint amicus brief in the SEC’s suit against Kraken.

They argued that the SEC’s lawsuit could harm consumers and accused the agency of expanding the definition of an “investment contract.” The attorneys general emphasized that cryptocurrencies should not automatically be classified as securities.

States Say they Oppose the SEC’s Enforcement Action

The filing says that the states are not supporting the exchange but are opposing the federal regulator.

They expressed concerns about potential preemption of state consumer protection laws and state regulations related to cryptocurrencies.

The attorneys general emphasized that some state laws offer better consumer protection than federal securities laws and that the SEC’s exercise of undelegated authority puts consumers at risk.

“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 amicus brief warned that if the SEC succeeds in its lawsuit, it could potentially preempt state consumer protection laws and state crypto regulations.

It further argued that “Investment contracts” under the Securities Act and the Exchange Act are not meant to serve as general consumer protection statutes covering all asset purchases.

Furthermore, some states have adopted regulatory regimes that treat crypto assets as money transmitters.

Many states have implemented statutory and regulatory regimes that treat crypto assets as money transmitters. Money transmitters are generally required to register and show minimum net worth, sufficient security, and subject themselves to examinations by state regulators. These…

— paulgrewal.eth (@iampaulgrewal) March 1, 2024

The SEC sued Kraken last year, alleging that the exchange had failed to register as a securities broker, clearinghouse, or trading platform.

The SEC has brought similar complaints against other companies such as Coinbase and Binance.

Kraken recently filed a motion to dismiss the SEC’s allegations, arguing that the agency had failed to provide plausible evidence and had overreached its bounds.

Industry Leaders File in Support of Kraken

The case has garnered attention from industry groups, including the Chamber of Digital Commerce, the Blockchain Association, and the DeFi Education Fund, which have filed amicus briefs in support of Kraken.

U.S. Senator Cynthia Lummis (R-Wyo.) also filed a brief in the case, echoing the stance taken in the SEC’s lawsuit against Coinbase.

At the time, the senator accused the agency of relying on a “ruling by enforcement” strategy, highlighting that crypto asset companies seeking guidance from the SEC often face enforcement actions that lack clear justification and ultimately harm consumers.

“The SEC cannot continue ruling by enforcement. Crypto asset companies have repeatedly tried to get guidance from the SEC only to be hit with enforcement actions, causing unnecessary harm to consumers,” she said.

More recently, SEC Commissioner Hester Peirce said that the regulatory agency is operating in an “enforcement-only mode” when it comes to the regulation of cryptocurrencies.

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