Legal Battle Between Kraken and SEC Takes Unexpected Turn
The legal battle between San Francisco-based cryptocurrency exchange Kraken and the United States Securities and Exchange Commission (SEC) has taken an unexpected turn as the crypto platform garners support from eight states in the US, putting it one step ahead of the regulatory watchdog.
Kraken Gains Support From 8 US States
Well-known crypto advocate and Chief Legal Officer (CLO) of Coinbase, Paul Grewal, shared the latest update regarding the case of Kraken and the SEC with the crypto community a few hours ago on the social media platform X (formerly Twitter).
Grewal highlighted that the state of Montana has recently filed a remarkable amicus brief against the Commission’s case against Kraken. Additionally, seven other US states are also in support of the amicus filing against the regulatory agency.
Specifically, the states of Montana, Iowa, Arkansas, Nebraska, Mississippi, South Dakota, Texas, and Ohio are backing Kraken. These state attorney generals contend that the SEC’s legal action violates state rights and consumer safety rules by trying to regulate crypto assets as securities.
Grewal claims that these states believe that the “ecosystem” theory laid out by the Commission is illegal and dangerous to US residents while giving out several reasons why the states are against the notion.
According to Grewal, some states have strict laws that protect their consumers more than federal securities. Meanwhile, with the SEC’s unaccountable power to override state laws that are more suited to address the unique dangers of non-securities products, customers are put at risk.
States have a great interest in preventing the SEC’s attempt to regulate cryptocurrency assets as securities because it might potentially bypass consumers’ safety and other state laws.
Investment Contracts Are Intended For Unconventional Instruments
Grewal also noted that the Securities Act and the Exchange Act’s portrayal of “investment contracts” is not intended to function as universal consumer protection laws that apply to all asset acquisitions.
In addition, Grewal drew attention to the Wals v. Fox Hills Dev.Corp. (7th Cir. 1994), 24 F.3d 1016, 1018-19 to back up his claims. According to the statute’s wording, the phrase “investment contracts” is only meant to refer to non-traditional instruments with the fundamental characteristics of debt or equity securities.
Presently, a lot of states have put laws and regulations into place that categorize cryptocurrency assets as Money Transmitters. Money transmitters, in most cases, have to submit to inspections by state regulators and comply with registration requirements, proof of security, and minimum net worth. Grewal has stressed that these frameworks, diligently constructed by the states, run the risk of being preempted.
The conclusion of the Kraken and SEC’s case may have a significant impact on how crypto regulations develop worldwide.
Hot Take: Kraken Receives Support From Eight States in Legal Battle Against SEC
The legal battle between cryptocurrency exchange Kraken and the United States Securities and Exchange Commission (SEC) has taken an unexpected turn as eight US states rally behind Kraken’s cause. The states of Montana, Iowa, Arkansas, Nebraska, Mississippi, South Dakota, Texas, and Ohio are supporting Kraken by filing an amicus brief against the SEC’s case.
The state attorney generals argue that the SEC’s legal action violates state rights and consumer safety rules by attempting to regulate crypto assets as securities. They believe that the “ecosystem” theory put forth by the SEC is illegal and poses a danger to US residents.
These states contend that their consumer protection laws are more stringent than federal securities laws, and the SEC’s power to override these state laws puts customers at risk. They also fear that SEC regulation of cryptocurrency assets as securities could undermine consumers’ safety and other state laws.
Paul Grewal, Chief Legal Officer of Coinbase, supports these arguments and cites the limited scope of “investment contracts” in the Securities Act and Exchange Act. He argues that investment contracts only refer to non-traditional instruments with characteristics of debt or equity securities, not all asset acquisitions.
Grewal warns that many states have already classified cryptocurrency assets as Money Transmitters, subjecting them to state regulations such as inspections, registration requirements, proof of security, and minimum net worth. However, these state frameworks could be preempted if the SEC’s attempt to regulate crypto assets as securities is successful.
The outcome of Kraken’s case against the SEC could have far-reaching implications for crypto regulations worldwide. It will be interesting to see how this legal battle unfolds and whether other states or regulatory agencies will join the fray in supporting or opposing the SEC’s position.
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