State Attorneys General Challenge SEC’s Jurisdiction in Kraken Case

A coalition of state attorneys general has contested the authority of the U.S. Securities and Exchange Commission (SEC) in the ongoing legal action against the cryptocurrency exchange Kraken.

On Thursday, law enforcement representatives from Montana, Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas submitted a collective amicus brief in the SEC’s case against Kraken.

They contended that the SEC’s lawsuit could negatively impact consumers and accused the agency of broadening the definition of an “investment contract.” The attorneys general stressed that cryptocurrencies should not be automatically categorized as securities.

States Declare Opposition to SEC’s Enforcement Action

The submission indicates that the states are not endorsing the exchange but are opposing the federal regulator.

They voiced concerns regarding the possible preemption of state consumer protection laws and state regulations concerning cryptocurrencies.

The attorneys general highlighted that certain state laws provide superior consumer protection compared to federal securities laws and that the SEC’s exercise of undelegated authority endangers consumers.

“States have a significant interest in preventing the potential preemption of consumer protection and other state laws by the SEC’s effort to regulate crypto assets as securities,” the submission stated.

The amicus brief cautioned that if the SEC prevails in its lawsuit, it could potentially override state consumer protection laws and state crypto regulations.

It further asserted that “Investment contracts” under the Securities Act and the Exchange Act are not intended to function as general consumer protection statutes applicable to all asset purchases.

Moreover, some states have established regulatory frameworks that classify crypto assets as money transmitters.

Numerous states have enacted statutory and regulatory frameworks that categorize crypto assets as money transmitters. Money transmitters are typically required to register and demonstrate minimum net worth, adequate security, and submit to examinations by state regulators. These…

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

The SEC initiated legal action against Kraken last year, claiming that the exchange had not registered as a securities broker, clearinghouse, or trading platform.

The SEC has filed similar complaints against other firms such as Coinbase and Binance.

Kraken has recently submitted a motion to dismiss the SEC’s claims, arguing that the agency has not provided credible evidence and has exceeded its authority.

Industry Leaders Show Support for Kraken

The case has attracted attention from industry organizations, including the Chamber of Digital Commerce, the Blockchain Association, and the DeFi Education Fund, which have submitted amicus briefs in favor of Kraken.

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

At that time, the senator accused the agency of employing a “ruling by enforcement” approach, emphasizing that crypto asset companies seeking guidance from the SEC frequently encounter enforcement actions that lack clear rationale and ultimately harm consumers.

“The SEC cannot persist in ruling by enforcement. Crypto asset companies have consistently sought guidance from the SEC only to be subjected to enforcement actions, resulting in unnecessary harm to consumers,” she stated.

More recently, SEC Commissioner Hester Peirce remarked that the regulatory agency is functioning in an “enforcement-only mode” regarding the regulation of cryptocurrencies.

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