Montana Blasts SEC 'Regulatory Power Grab' in Kraken's Case: 'Crypto Assets Are Not Automatically Securities'

Montana introduced an amicus curiae in the case of the SEC vs. Kraken, a US-based crypto exchange, criticizing the “regulatory power grab” of the institution. Montana, supported by seven other states, affirms that crypto assets are not automatically securities and that the SEC’s expansive concept of “investment contract” might preempt state legislation.

Montana and Seven More States Criticize SEC ‘Investment Contract’ Expanded Definition in Amicus Curiae

Montana and seven more U.S. states have raised their voices to establish their position on the U.S. Securities and Exchanges Commission (SEC)’s regulatory actions against the cryptocurrency industry. The state of Montana, with the support of Arkansas, Iowa, Mississippi, Nebraska, Ohio, South Dakota, and Texas, filed an amicus curiae document in the case that the SEC is leading against Kraken, a leading U.S. cryptocurrency exchange.

While the document is not focused on supporting any party, the attorney generals of these states heavily criticize the SEC’s position on its regulatory actions, stating that it exceeds its designated powers by expanding its jurisdiction to assets out of its oversight.

Austin Knudsen, Montana’s Attorney General, explained:

Crypto assets are not automatically securities. The SEC’s overly broad interpretation of investment contract means that the SEC is exceeding its authority by attempting to regulate non-securities.

The states stress that the original definition of “investment contract” was built based on the so-called “blue sky” laws to protect financial investors and not the general consumer purchasing different assets. According to them, the sales of cryptocurrency assets in secondary market platforms don’t meet the “Howey test,” used to determine the presence of an investment contract.

The amicus curiae argues that there is no investment contract between buyers and sellers on platforms like Kraken, and there is no real expectation of profit produced by the efforts of others derived from these operations. In other cases, the SEC has discussed that the existence of an ecosystem behind these tokens is equivalent to the “efforts of others” condition mentioned in Howey.

This notion, however, has already been criticized by Judge Failla in the case that the SEC leads against Coinbase, who was worried that this expansive view might make even collectibles securities.

In this case, the states also disagree with this view, warning about the effects of its acceptance. They declare:

Such an expansive view would turn ordinary baseball card collectors into securities investors and third-party sellers of baseball cards into securities exchanges.

By expanding its reach, the SEC would also conflict with issues traditionally handled by state regulation, such as consumer protection. This move would also curb state experimentation and regulation of cryptocurrency assets, that are currently developing.

Marco Santori, Kraken’s CLO, praised the “cogent” arguments presented by these states, stressing that while the document was not filed in support of Kraken, it was still directed against the “unconstitutional expansion of the SEC’s power” and “focused on consumer protection.” On February 27, the Chamber of Digital Commerce also introduced a document supporting Kraken’s position in the case.