A federal judge in California has ruled that the Securities and Exchange Commission (SEC) lawsuit against Kraken, a well-known cryptocurrency exchange platform, will continue in court. The SEC sued Kraken last year, accusing the company of failing to register as a broker, exchange or clearinghouse, in violation of securities regulations.
JUST IN: 🇺🇸 SEC lawsuit against Kraken crypto exchange will proceed to trial, California judge rules.
— Watcher.Guru (@WatcherGuru) August 26, 2024
SEC charges against Kraken
The SEC has made allegations that some of the cryptocurrency transactions Kraken facilitates through its network constitute investment contracts and thus could be considered securities subject to federal securities laws. According to the SEC, Kraken should have registered as a regulated company to operate legally.
Judge William H. Orrick of the Northern District of California ruled on August 23, 2024, that the SEC had “plausibly demonstrated” that at least some of the cryptocurrency transactions made on Kraken could be considered investment contracts. Accordingly, he denied Kraken’s motion to dismiss the lawsuit.
The failure of Kraken’s motion to dismiss
In February 2024, Kraken moved to dismiss the lawsuit, arguing that the SEC’s allegations do not meet the legal criteria for a violation. Kraken argued that cryptocurrencies do not meet the definition of a security under the “Howey Test,” a legal criterion used to determine whether a transaction constitutes an investment contract. Although this argument was initially viewed favorably, Judge Orrick concluded that the issue requires further investigation. According to the judge, while cryptocurrencies themselves are not securities, the circumstances of their sale could constitute an investment contract and thus be subject to federal securities regulations. Judge Orrick emphasized the need to distinguish between digital assets and the contracts that govern their sale. The judge explained that the SEC is not claiming that individual cryptocurrency tokens traded on Kraken are securities per se, but that the contracts governing their sale may constitute an investment contract. This distinction is crucial in determining the applicability of securities laws.
Impact on the cryptocurrency market
The Orrick decision is a sign of increasing regulatory focus on cryptocurrency exchange platforms and their products. The lawsuit against Kraken is part of a broader SEC strategy to introduce greater oversight of cryptocurrencies, including certain digital currencies such as Cardano (ADA) and Solana (SOL), which the SEC believes should be classified as securities.
