New crypto battle: the SEC vs Kraken

New problems for the crypto exchange Kraken because of the SEC. 

This time, however, the exchange is not giving up, and is striking back. 

The crypto precedent between Kraken and the SEC

In February this year, US exchange Kraken was forced to shut down its staking service due to allegations from the SEC. 

At the time, the agency that oversees the security market in the US had accused the exchange of precisely providing an unregistered security investment service. 

In other words, the SEC believed that a service such as staking-as-a-service, in which investors earn money only from the work of the exchange node, was rightfully part of the offering of investment in security, and since it was an offering that was not registered with the SEC, they believed that it was being offered illegally. 

Kraken decided to cut corners by shutting down the service, rather than challenge the agency. 

Since then, however, things have changed, largely due to XRP’s victory in the agency’s lawsuit against Ripple. 

That ruling greatly scaled back assumptions about whether some cryptocurrencies, or some crypto services, should be considered security, probably also allowing Kraken itself to change its stance. 

The new complaint

Yesterday, it turned out that the SEC has again sued Kraken. 

This time it is not accused of offering investments in unregistered security, but of operating as an unregistered stock exchange. 

The basic concept, however, is the same: the offering to the public of services that, in theory, should be authorized by the agency, but instead are unlicensed. 

What is surprising, however, is that such accusations have been made only against Kraken, and not also against the other US exchanges that practically do the same thing. 

However, it may also only be a matter of time, such that the SEC may have started with Kraken and then perhaps continued with other exchanges. 

In fact Kraken, as indeed are the other crypto exchanges, are not SEC-registered entities, but because they offer cryptocurrency exchanges, which themselves are not regulated assets in the US. 

In other areas, such as the European Union, cryptocurrencies are now legally recognized and regulated assets, and there are often special registries with which crypto exchanges must register. 

The US, on the other hand, lags behind in this respect, in part because of the lack of political convergence in Congress toward a text to regulate cryptocurrencies that, although it already exists, has not yet garnered enough support to be passed. 

Charges against crypto exchange Kraken by the SEC

So the crypto exchange is accused of failing to register with a registry that does not exist in the US, and of operating as an unrecognized operator of unregulated asset exchanges. 

After several defeats over the course of the year in different courts, the SEC nevertheless decided to continue its fight against cryptocurrency markets, but by now its effectiveness in doing so has been widely questioned. 

Suffice it to say that one court has written in black and white that the SEC erred in deciding not to approve Grayscale’s request to confer its Bitcoin Trust into an ETF on spot Bitcoin. 

At this point it is understandable why Kraken has not decided to give up so easily this time. 

The legal battle

With a post on their official blog, Kraken’s legal team yesterday clearly announced that they will give battle this time. 

They state that they do not agree with the SEC’s new charges, adding that this time they intend to vigorously defend their position in court. 

So after Ripple, Grayscale and Coinbase, Kraken will also challenge the SEC in court. 

They further add that the complaint will have no impact on the exchange’s operations. 

They also stress that no allegations of fraud, market manipulation, loss of customers due to hacking or security compromise, and no breach of fiduciary duty appear in the complaint. Instead, it is merely a technical-legal issue with which they strongly disagree. 

They write: 

“the complaint makes a technical argument: that Kraken’s business requires special securities licenses to operate because the digital assets we support are really “investment contracts.” This is incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”

What’s more, there is also already a court ruling that says that for example XRP is definitely not an investment contract. 

The challenge

Kraken highlights how the SEC claims that digital asset trading platforms can “enter and register” with the agency. 

However, they point out that there is not a single law to support this position, and that the SEC itself has never promulgated any rules on the matter. Nor is there yet any official guidance on how such an operation should be carried out. 

They add that Congress is pursuing a bill to that effect, evidently hoping that sooner or later it will be passed so as to finally bring clarity. 

The election campaign

While there seems little likelihood from such a picture that the SEC will be able to win such a case in court, it should not be forgotten, however, that there will be elections in the US next year. 

The current government is Democratic, and SEC Chairman Gary Gensler has always been part of the Democratic ruling class. 

Part of the campaigning in the run-up to next year’s elections revolves precisely around the fact that the Democrats are outspoken against cryptocurrencies, despite the fact that many of them have been funded by FTX. 

The SEC is about to have to approve spot Bitcoin ETFs, and so its chairman may want to give some not-so-positive signals toward the crypto sector, which is perhaps disliked by part of the Democratic electorate. 

This would justify the initiative against Kraken even in the absence of a good chance of success. 

What is unfortunate is that the costs of such an initiative will not be borne by Gensler at all, but only by private companies like Kraken and, of course, the American taxpayers.