A group of state attorneys general has filed a brief in support of Kraken, the cryptocurrency exchange that is facing a lawsuit from the Securities and Exchange Commission (SEC) over its alleged unregistered offering of digital assets.
The brief, submitted by 21 state AGs led by Texas Attorney General Ken Paxton, argues that the SEC has exceeded its statutory authority and violated the principles of federalism by attempting to regulate cryptocurrencies as securities.
The state AGs claim that cryptocurrencies are not securities, but rather commodities or currencies that fall under the jurisdiction of other federal and state agencies, such as the Commodity Futures Trading Commission (CFTC) or the Treasury Department.
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They also contend that the SEC’s lawsuit against Kraken is an example of “regulation by enforcement”, which creates uncertainty and confusion for market participants and stifles innovation in the emerging crypto industry.
The brief states:
The SEC’s enforcement action against Kraken is not only legally flawed, but also represents a dangerous overreach that threatens to undermine the constitutional balance between federal and state authority. The SEC’s attempt to regulate cryptocurrencies as securities is contrary to Congress’s intent, the SEC’s own regulations, and decades of judicial precedent.
Moreover, the SEC’s aggressive and inconsistent enforcement actions create uncertainty and deter innovation in a field that offers immense potential for economic growth, social development, and individual freedom.
The state AGs urge the court to dismiss the SEC’s complaint against Kraken and to affirm the primacy of state regulation over cryptocurrencies.
Kraken, which is based in San Francisco, was sued by the SEC in April 2021 for allegedly raising over $1.3 billion through the sale of digital tokens that the SEC deemed to be securities. Kraken has denied the allegations and argued that its tokens are not securities, but rather utility tokens that provide access to its platform and services.
Kraken’s CEO Jesse Powell has welcomed the support from the state AGs and expressed his hope that the case will set a precedent for the crypto industry.
He tweeted:
I’m grateful for the leadership of KenPaxtonTX and 20 other state AGs in standing up for crypto innovation and state sovereignty. This case is bigger than Kraken. It’s about the future of crypto and who gets to decide it: the people or unelected bureaucrats.
IRS’s hires two crypto Natives on its Digital asset Team
The Internal Revenue Service (IRS) has recently announced the addition of two new members to its team of digital currency experts. Joining the team are Sulolit “Raj” Mukherjee, the former global head of tax at Consensys, and Seth Wilks, the former vice president of government relations at crypto tax software firm TaxBit who have both been working in the crypto industry for over a decade and have extensive knowledge and experience in the field.
According to a LinkedIn post, Mukherjee and Wilks have been long-time industry colleagues and friends. IRS Commissioner Danny Werfel noted in a press release reviewed by Blockworks that the digital asset space was an “evolving sector” with major tax administration implications.
They are not only well-known figures in the crypto community, but also long-time colleagues and friends. They have collaborated on several projects and initiatives related to digital currency regulation, compliance, education, and innovation. They have also been vocal advocates for the adoption and integration of crypto technologies in various sectors and industries.
According to the IRS, the duo will play key roles in developing and implementing the agency’s strategy and policies regarding the taxation and oversight of crypto transactions. They will also provide guidance and support to other IRS divisions and offices, as well as external stakeholders, on crypto-related matters.
The IRS has been ramping up its efforts to address the challenges and opportunities posed by the growing use and popularity of digital currencies. In recent years, the agency has issued guidance, updated forms, launched enforcement actions, and partnered with other agencies and organizations to enhance its understanding and capabilities in this area.
The hiring is seen as a positive sign by many in the crypto industry, who hope that their expertise and perspective will help the IRS adopt a more balanced and nuanced approach to crypto taxation and regulation. Some also hope that their presence will foster more dialogue and collaboration between the IRS and the crypto community, leading to more clarity, fairness, and innovation in the field.
Hong Kong SFC issues warning against crypto exchange, BitForex
Meanwhile, the Securities and Futures Commission (SFC) of Hong Kong has issued a warning against BitForex, a cryptocurrency exchange platform that claims to be licensed in the city. The SFC stated that BitForex is not authorized to offer any regulated activities in Hong Kong and advised investors to exercise caution when dealing with the platform.
According to the SFC’s website, BitForex is not registered as a licensed corporation or an associated entity of a licensed corporation under the Securities and Futures Ordinance (SFO). The SFC also noted that BitForex’s purported address in Hong Kong does not exist, and that its website does not provide any contact details for its Hong Kong office.
The SFC warned that unlicensed platforms may not have adequate systems to safeguard client assets and may operate outside the legal and regulatory framework that governs the securities and futures markets in Hong Kong. Investors who trade on such platforms may not be protected by the SFC’s investor compensation fund, which covers losses arising from defaults by intermediaries licensed by the SFC.
The SFC urged investors to check the SFC’s Public Register of Licensed Persons and Registered Institutions before engaging in any investment activities, and to report any suspected scams or frauds to the SFC or the police.
BitForex is one of the many cryptocurrency platforms that have been targeted by regulators around the world in recent months, as authorities seek to crack down on illicit activities and protect investors from potential risks.
In September 2021, China banned all cryptocurrency transactions and mining activities, while the UK’s Financial Conduct Authority (FCA) banned Binance, the world’s largest crypto exchange, from operating in the country without proper authorization. The US Securities and Exchange Commission (SEC) has also filed lawsuits against several crypto platforms, including Ripple and Coinbase, for allegedly violating securities laws.
BitForex has not responded to the SFC’s warning or commented on the allegations of fraud. On February 23, 2024, BitForex went offline after $57 million was reportedly withdrawn from the exchange’s hot wallets. Users have reported difficulties accessing their accounts and withdrawing their funds since then.
The SFC has requested the Hong Kong Police Force to block access to BitForex’s website links and social media pages to prevent further potential fraud and protect investors.
The SFC has issued a warning to the public about the risks of dealing with BitForex and has instructed the Hong Kong Police Force to block access to its website links and social media pages.
The SFC stated that BitForex is not licensed or registered to conduct any regulated activities in Hong Kong and that it has received numerous complaints from investors who have lost money or encountered difficulties in withdrawing their funds from the platform.
The SFC also alleged that BitForex has made false or misleading representations on its website, such as claiming to have a high level of security, liquidity and compliance. The SFC urged investors to exercise caution and avoid any transactions with BitForex or any other unregulated cryptocurrency platforms.
The SFC also reminded investors to check the SFC’s website for a list of licensed or registered entities before engaging in any investment activities. The SFC’s action against BitForex is part of its ongoing efforts to combat illegal and fraudulent activities in the cryptocurrency market and to protect the interests of investors in Hong Kong.
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