SEC overstepped its authority in Kraken case, state AGs allege

Eight state attorney generals warn the SEC’s enforcement actions could “stymie” potential state legislation around crypto

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Iowa Attorney General Brenna Bird | Gage Skidmore/"Brenna Bird" (CC license)

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The Securities and Exchange Commission exceeded “its delegated powers” in attempting to regulate “non-securities,” state attorney generals allege.

In an amicus brief filed in the regulatory agency’s case against Kraken’s parent company, eight state AGs pushed back against enforcement actions being taken by the agency in cases involving crypto. 

The SEC filed a suit against the parent companies in November of last year, alleging that Kraken operates as an unregistered exchange, commingled customer funds, and lists some cryptocurrencies that it claims are securities. 

Read more: SEC accuses Kraken of commingling customer funds, operating unregistered exchange

Montana Attorney General Austin Knudsen filed the brief, which was also supported by attorney generals from Texas, Iowa, Nebraska, Mississippi, South Dakota and Arkansas. 

The AGs clarify that they are not supporting either party in the case, due to the state of Montana taking “no position as to the conduct or business practices of Payward.”

However, the states take issue with the SEC’s regulation by enforcement approach, alleging that the agency has not been given the power to regulate crypto as a security. The arguments made in the filing echo previous arguments made in both Binance and Coinbase’s SEC suits.  

Read more: New lawsuit challenges SEC’s regulation by enforcement approach

The states oppose “SEC regulation of crypto assets absent an investment contract because Congress has not delegated that authority to the SEC.”

“The SEC’s exercise of this undelegated authority puts consumers at risk by potentially preempting state statutes better tailored to the specific risks of non-securities products. Some state laws are more protective of consumers than the federal securities laws,” the states alleged.

Gary Gensler’s agency has a handful of open court cases against crypto companies. In its cases against both Binance and Coinbase, it lists a number of the same tokens and alleges that they’re unregistered securities. The list includes ALGO, MATIC, ATOM, SOL, among others. 

Read more: Gensler’s SEC brought 46 crypto-related enforcements in 2023

The SEC’s “expansive interpretation of ‘investment contract’ would mean that Congress somehow intended the SEC to function as a general-purpose consumer protection regulator for any crypto asset where purchasers hope the value will increase,” Knudsen wrote.

The SEC’s “this over-reach will become increasingly problematic as the crypto-asset economy expands,” he continued. 

The brief cites Gensler’s previous comments on crypto asset regulation. 

“Exchanges trading in these crypto assets do not have a regulatory framework either at the SEC, or our sister agency, the Commodity Futures Trading Commission,” Gensler testified in 2021.

His testimony was also mentioned by Coinbase in August of last year when the exchange sought to dismiss the suit.

However, the states further point out that the SEC’s enforcement activity overlaps with “traditional state regulation.”

“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,” Knudsen wrote. 

The states further allege that Gensler’s agency, while it does have the authority to oversee investment contracts, is trying to “ignore” limitations and “apply ‘investment contract’ to assets that do not meet the Howey definition.”

“The SEC’s attempted preemption of crypto assets also stymies state legislative experimentation in this area,” the AGs argued.

The SEC didn’t immediately return a request for comment.


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