Eight state attorneys general in the United States have joined forces to challenge the Securities and Exchange Commission (SEC) in its lawsuit against the cryptocurrency exchange Kraken. In a joint amicus brief filed on Feb. 29, officials from Arkansas, Iowa, Mississippi, Montana, Nebraska, Ohio, South Dakota, and Texas, along with industry lobbyists, argued that the SEC has overstepped its regulatory bounds.
The amicus brief, while not aligning with either party involved in the lawsuit, opposes the SEC’s attempt to regulate crypto assets absent an investment contract. The attorneys general asserted that Congress has not delegated such authority to the SEC and emphasized the importance of preserving state laws, including consumer protection regulations.
Highlighting concerns over the SEC’s definition of an “investment contract,” the state officials argued that expanding this definition could potentially breach state laws aimed at safeguarding consumers. They emphasized that some state laws offer more robust consumer protections than federal securities laws and cautioned against regulatory overreach.
This legal challenge from the state attorneys general follows a motion filed by Kraken on Feb. 22, seeking the dismissal of the lawsuit on similar grounds of regulatory overreach. Kraken argued that granting the SEC unchecked authority could set a dangerous precedent and criticized the agency for lacking a limiting principle in its enforcement actions.
In response to the SEC’s allegations of operating without registration and engaging in malpractices, Kraken vehemently denied the accusations. The cryptocurrency exchange argued that the SEC’s claims were flawed, particularly regarding the characterization of crypto tokens as “investment contracts” without evidence of contractual agreements between customers and the exchange.
The SEC’s lawsuit against Kraken, filed in November, alleges various regulatory violations, including operating as an unregistered entity, mishandling client funds, and failing to address conflicts of interest. This legal battle is part of the SEC’s broader crackdown on crypto-related firms, with similar complaints lodged against industry giants like Coinbase and Binance.
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As the legal showdown between Kraken and the SEC unfolds, the involvement of state attorneys general underscores the complex regulatory landscape surrounding cryptocurrencies and the ongoing debate over the appropriate scope of federal oversight in this rapidly evolving industry.