State attorneys general, representing eight states in the United States, have jointly filed an amicus brief asserting that the Securities and Exchange Commission (SEC) has exceeded its authorised powers in the lawsuit against the cryptocurrency exchange Kraken. The brief, submitted on February 29th, includes officials from Arkansas, Iowa, Mississippi, Montana, Nebraska, Ohio, South Dakota, and Texas, as well as industry lobbyists.
The filing clarifies that the state officials are not taking sides with either party but rather contest the SEC’s regulation of crypto assets in the absence of an investment contract, as they believe Congress has not granted this authority to the SEC. They argue that the SEC’s interpretation of what constitutes an “investment contract” is too broad and that states should have the authority to safeguard against any overreach of state laws, including consumer protection statutes, which might be violated if the SEC were to regulate crypto assets as securities.
The attorneys general stress that categorising crypto assets as securities without an investment contract could endanger state consumers by preempting state laws that are better suited to addressing the unique risks associated with non-securities products. They assert that the SEC’s enforcement action exceeds the powers delegated to it, highlighting that some state laws offer more robust consumer protection than federal securities laws.
This development follows a motion filed by Kraken on February 22nd, seeking to dismiss the lawsuit entirely on similar grounds of regulatory overreach and the establishment of dangerous precedent. Kraken contends that the SEC’s lawsuit lacks a limiting principle and would grant the agency excessively broad authority.
Kraken has refuted the SEC’s allegations in a blog post, particularly disputing the claim that it operates an unlicensed securities exchange, broker, dealer, or clearing agency. Kraken argues that the SEC’s characterization of crypto tokens as “investment contracts” lacks evidence of actual contractual agreements between customers and the exchange.
In November, the SEC initiated its lawsuit against Kraken, alleging violations including operating without registration, mingling client funds, and failing to prevent conflicts of interest. Similar complaints have been lodged by the SEC against other crypto-related firms such as Coinbase, Binance, and the U.S. branch of Bittrex, with ongoing cases involving the first two.