Kraken has filed to dismiss an SEC lawsuit that would grant the regulator “boundless authority over commerce and potentially open up the floodgates to private securities law claims,” in the crypto exchange’s opinion.

Crypto exchange Kraken on Feb. 22?filed its dismissal motion against a November lawsuit from the United States Securities and Exchange Commission with a San Francisco federal court.

The filing argues that the lawsuit sets a “dangerous precedent,” eliminating the limiting principle which could potentially “turn a broad range of ordinary assets or commodities, like sports memorabilia, trading cards, expensive watches, or even diamonds, into securities.”

“The SEC’s theory is that there can be an investment contract with no contract, no post-sale obligations and no interaction at all between the issuer and the purchaser.”

Kraken

The crypto firm objects to such a theory and expresses worry that a positive decision in the lawsuit would grant the SEC endless authority over the commercial landscape, ultimately allowing the regulator to handle even private securities law claims.

Kraken representatives also note that crypto companies in the U.S. are forced to operate under constant regulatory enforcement actions, while other jurisdictions across the globe create more favourable legal environments for the emerging decentralized finance sector.

The SEC’s latest legal motion against Kraken alleges the firm has unlawfully earned millions of dollars from “crypto asset securities” transactions and provided “exchange, broker, dealer, and clearing agency” services without proper registration with the agency “as required by law.

In addition, the regulator claims that the crypto exchange had deficient internal controls, which resulted in $33 billion worth of customer assets getting commingled with business funds.

However, Kraken argues that the SEC failed to allege that the cryptocurrencies traded on the exchange were “investment contracts.” As there was no agreement between Kraken customers and the cryptocurrency issuers, the exchange states that its customers “could not reasonably expect profits from the efforts of issuers.”

According to Kraken, the definition of security provided by the SEC could theoretically “‘securitize’ any simple asset sale with an alleged speculative purpose like comic books and baseball cards,” and securities laws “have never given the SEC […] such vast authority.”

At the beginning of 2023, Kraken agreed to immediately end its U.S. crypto staking operations to settle charges with the U.S. Securities and Exchange Commission (SEC).