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SEC’s Case Against Kraken Will Proceed to Trial, California Judge Rules

 SEC’s Case Against Kraken Will Proceed to Trial, California Judge Rules

A federal judge ruled that the Securities and Exchange Commission had brought plausible allegations against crypto exchange Kraken, meaning its lawsuit will proceed to trial.

The SEC sued Kraken last year, alleging the exchange failed to register as a broker, exchange or clearinghouse.

The U.S. Securities and Exchange Commission’s (SEC) lawsuit against Kraken will proceed to trial, a California judge ruled Friday.

The SEC sued Kraken in the Northern District of California last November, alleging that the crypto exchange had violated federal securities laws by failing to register with the agency as a broker, clearinghouse or exchange. The complaint requested that Kraken be permanently enjoined from further securities violations, as well as disgorgement of its “ill-gotten gains” and other civil penalties.

Kraken is just one of the major crypto exchanges currently caught up in the SEC’s legal dragnet. Similar lawsuits were filed against Binance and Coinbase last year, alleging that both exchanges also violated securities laws by failing to register as brokers, clearinghouses and exchanges with the SEC. Both Coinbase and Binance attempted to get the cases against them thrown out – and both failed, with the judges overseeing each case ruling that the bulk of the cases against them can move forward to trial.

Now, Kraken’s motion to dismiss the SEC’s case has also been denied. In his Aug. 23 ruling, U.S. District Court Judge William H. Orrick of the Northern District of California wrote that the SEC has “plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws.”

Kraken’s ill-fated motion to dismiss, filed in February, argued that the SEC had failed to state a claim – essentially, that the facts in the case, even if true, did not constitute a violation of the law – arguing that cryptocurrencies do not meet the definition of a security as defined by the Howey Test.

Orrick agreed with Kraken in part, ruling that the cryptocurrencies named by the SEC in its lawsuit were “not themselves investment contracts” – an argument that SEC attorneys have distanced themselves from in hearings in some of these cases.

“Numerous courts have distinguished between the digital assets and the offers to sell them before engaging in an analysis of whether cryptocurrency transactions constitute investment contracts. The distinction is valuable,” Orrick wrote. “Although the way the SEC labels the crypto assets at issue – as ‘crypto asset securities’ – is unclear at best and confusing at worst, I do not understand the SEC to be alleging that the individual cryptocurrency tokens in which Kraken enables transactions are themselves securities.”

“The meat of the SEC’s pleadings alleges that during their initial offerings and throughout subsequent transactions on Kraken, those assets were offered as, or sold as, investment contracts. This is an acceptable framing, and one that the SEC has repeatedly advanced in other cases,” the judge added.

Kraken’s Chief Legal Officer Marco Santori celebrated this section of Orrick’s ruling on X (formerly Twitter) writing:

“Today, the Federal Court for the Northern District of California ruled, as a matter of law, that none of the tokens trading on Kraken are securities. This is a significant win for Kraken, for the principle of clarity and for crypto users everywhere. It also confirms Kraken’s long-standing position that it does not list securities.”

A representative for Kraken declined to comment beyond Santori’s X post.

But just because Orrick ruled that the cryptocurrencies themselves were not securities, it does not mean that the purchase and sale of them cannot plausibly be considered an investment contract.

“Orange groves are no more securities than cryptocurrency tokens are,” Orrick wrote. “But the contracts surrounding the sale of both may form an investment contract, bringing them within the purview of the [Exchange] Act.”

Kraken’s motion to dismiss also argued that the case should be tossed out under the Major Questions Doctrine – a legal principle established by the Supreme Court that holds that agencies should not expand their regulatory powers without clear authorization from Congress.

But like other judges asked to weigh in on the doctrine, Orrick disagreed with Kraken, stating that the $3 trillion cryptocurrency industry is simply not big or important enough in the U.S. economy or political sphere to invoke the Major Questions Doctrine.

“Other courts have already considered whether similar claims brought by the SEC violate the major questions doctrine and found that they do not,” Orrick wrote. “The same is true here…while cryptocurrency itself is a relatively novel financial instrument, the principles driving the SEC’s attempt to assert regulatory authority over it are not new.”

Both parties are required to submit a Joint Statement by Oct. 8, which will include a proposed case schedule and trial date.

Edited by Nikhilesh De.

  

Cheyenne Ligon

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