State AGs challenge SEC’s crypto authority in Kraken case

The U.S. Securities and Exchange Commission (SEC) is facing pushback from eight state attorneys general who filed an amicus brief on Thursday, challenging the agency’s authority to regulate cryptocurrencies as securities in its lawsuit against Kraken’s parent company, Payward Ventures. The states, including Montana, Texas, Iowa, Nebraska, Mississippi, South Dakota, Arkansas, and Ohio, argue that the SEC’s actions could harm consumers by potentially preempting state laws that may offer better protection. The brief emphasizes that the SEC has not been granted the power to regulate crypto assets absent an investment contract by Congress.

The state attorneys general are not taking sides with Kraken but are opposing the SEC’s “regulation by enforcement” approach, which they claim exceeds the agency’s delegated powers. They argue that the SEC’s expansive interpretation of “investment contract” could lead to the agency functioning as a general-purpose consumer protection regulator for any crypto asset, which they believe is not the intent of Congress. The states also express concerns about the SEC’s potential preemption of state consumer protection laws and state regulations related to cryptocurrencies, which could stifle state legislative experimentation in the crypto sector.

The SEC’s lawsuit against Kraken, filed last year, alleges that the exchange operated as an unregistered exchange, commingled customer funds, and listed cryptocurrencies that the SEC claims are securities. Similar allegations have been made against other crypto companies, including Coinbase and Binance. The SEC’s enforcement actions have been criticized by industry leaders and U.S. Senator Cynthia Lummis, who argue that the agency’s strategy harms consumers and stifles innovation.

The case has attracted attention from various industry groups, such as the Chamber of Digital Commerce, the Blockchain Association, and the DeFi Education Fund, which have filed amicus briefs in support of Kraken. Additionally, SEC Commissioner Hester Peirce has voiced concerns about the agency operating in an “enforcement-only mode,” highlighting the need for clearer regulatory guidance to foster innovation in the crypto industry. The SEC has not immediately responded to the allegations made in the amicus brief.