Kraken Wins Support From Eight States In SEC Lawsuit

The US Securities and Exchange Commission (SEC) is facing strong opposition from eight states in its lawsuit against Kraken, a San Fransisco-based cryptocurrency exchange. The states have filed an amicus brief supporting Kraken, arguing that the SEC is overstepping its authority and endangering consumers by trying to regulate crypto assets as securities.

The amicus brief was filed by Montana and joined by Iowa, Arkansas, Nebraska, Mississippi, South Dakota, Texas, and Ohio. These states have laws and regulations governing the crypto industry and protecting their residents from fraud and abuse.

According to Paul Grewal, the Chief Legal Officer (CLO) of Coinbase and a prominent crypto advocate, who shared the news on the social media platform X (formerly Twitter), the states claim that the SEC’s “ecosystem” theory is illegal and harmful to the US citizens. Regardless of its nature or function, the theory considers any crypto asset used in a network or platform security.

Grewal explained that some states have more stringent consumer protection laws than federal securities laws and that the SEC’s power to override them puts customers at risk. To prevent the SEC from regulating crypto assets as securities and undermining their safety and other state laws, the states have an intense interest, he also pointed out.

Grewal cited the Wals v. Fox Hills Dev.Corp. (7th Cir. 1994), 24 F.3d 1016, 1018-19 case to support his arguments. The term “investment contracts” in the Securities and Exchange Acts does not intend to protect all consumers who buy assets, the case states. Instead, it only wants to cover non-traditional instruments with the essential features of debt or equity securities.

Kraken Case Could Shape The Future Of Crypto Regulation

Kraken is one of the leading cryptocurrency exchanges in the world, with over 6 million users and more than $1 billion in daily trading volume. The SEC sued Kraken in December 2023, alleging that the exchange sold unregistered securities to its customers as digital tokens.

Kraken has denied the allegations and challenged the SEC’s jurisdiction and authority over the crypto industry. The exchange has argued that its tokens are not securities but utility tokens that provide access to various services and features on its platform.

The outcome of the Kraken and the SEC’s case could significantly impact the future of crypto regulation in the US and globally. The case could set a precedent for how the law defines and treats crypto assets and how the states and the federal government can cooperate or conflict.

The case is currently pending in the US District Court for the Northern District of California. No date has been set for the trial yet.

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