Court Rejects Kraken’s Bid to Dismiss SEC Lawsuit

The SEC had filed a lawsuit against Kraken, accusing the cryptocurrency exchange of operating as an unregistered securities exchange. This means Kraken is alleged to be running a trading platform without the necessary legal approvals. This legal action could have significant implications for the exchange and the broader crypto market. Here's an overview of the case and what it might mean for the future.

Court Rejects Kraken’s Request to Dismiss SEC Lawsuit

A US federal court has rejected Kraken’s attempt to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC) that claims Kraken is running an unregistered securities exchange. This ruling, issued on August 23, confirms that the legal challenge against Kraken will proceed.

In November, the SEC charged Kraken with operating its crypto trading platform as an unregistered entity in multiple roles, including as a securities exchange, broker, dealer, and clearing agency.

The opinion from the Northern District of California court noted that the SEC has presented a reasonable argument suggesting that some of the cryptocurrency transactions managed by Kraken might qualify as investment contracts. As such, these transactions could be considered securities and are therefore subject to regulatory oversight.

Court Ruling Expands Definition of Securities, Impacting Crypto Regulation Debate

The recent court decision represents a pivotal moment in the ongoing clash between the cryptocurrency industry and the SEC over the classification of digital assets as “securities” under US law. This ruling continues to influence the debate on how these assets should be regulated.

An SEC spokesperson stated, “The court has reinforced that the long-standing criteria for identifying securities are still applicable, regardless of new terminologies. Investors in cryptocurrency assets should receive the same protections as those investing in traditional securities, even if transactions involve intermediaries.”

The spokesperson also stressed the importance of crypto trading platforms registering with the SEC and implementing robust safeguards to prevent fraud, asset commingling, and conflicts of interest. Without these measures, investor protection remains compromised.

The August 23 ruling broadens the scope of what constitutes a “security,” considering not only formal investment contracts but also the broader context in which virtual assets are marketed and sold. The court emphasized that an investment contract does not require rigid formalities; instead, it is the overall circumstances and investor expectations that are critical.

In response, Kraken’s chief legal officer, Marco Santori, asserted on August 23 via X that the court’s ruling indicated none of the tokens traded on Kraken are classified as securities. He noted that, similar to the Ripple case, the court distinguished between the token itself and the agreements related to it.

Santori added that the SEC must now prove that each transaction on Kraken meets the criteria of the Howey Test, a challenge he believes will be met with evidence to the contrary.