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

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.

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.