- The US District Court has denied Kraken’s request to dismiss the SEC’s lawsuit, allowing the case to proceed
- The SEC has alleged that Kraken operated as an unregistered securities exchange, broker, dealer, and clearing agency for crypto asset transactions
- This ruling follows closely after Kraken’s Australian branch was found to have violated regulatory rules, adding to the company’s legal challenges
The United States District Court for the Northern District of California on Friday denied Kraken’s motion to dismiss a lawsuit brought by the US Securities and Exchange Commission (SEC). The court’s decision allows the SEC’s case to move forward, alleging that Kraken, operated by Payward Inc. and Payward Ventures, functioned as an unregistered securities exchange, broker, dealer, and clearing agency for transactions involving crypto asset securities. The ruling came a day after Kraken’s Australian outfit was found to have fallen foul of regulator rules.
Crypto Sales Could Be Investment Contracts
The SEC’s lawsuit, initiated in November, accuses Kraken of facilitating the trading of various cryptocurrencies that the SEC classifies as “investment contracts” under the Securities Act, which would subject them to securities regulations. These assets include well-known cryptocurrencies such as Cardano (ADA), Algorand (ALGO), Solana (SOL), and others.
The court ruled that the SEC had “plausibly alleged” that some of Kraken’s crypto transactions could be considered investment contracts, thereby falling under securities law. This ruling does not constitute a final judgment but allows the case to proceed to further examination.
Judge William H. Orrick emphasized the application of the Howey Test, a 78-year-old legal framework used to determine whether a transaction involves an investment contract. He stated that this test applies regardless of whether the transaction occurs in a primary or secondary market. The court’s ruling suggests a broad interpretation of what constitutes a security, considering not only formal investment contracts but also the context in which the virtual assets were marketed and sold.
Investors Deserve Protection, Says SEC
The SEC’s spokesperson welcomed the court’s decision, asserting that the framework for identifying securities still applies to crypto assets. They argued that investors in these assets deserve the same protections as those in traditional securities, including safeguards against fraud and manipulation.
Kraken, however, remains steadfast in its defense. Marco Santori, Kraken’s chief legal officer, highlighted that the court had distinguished between tokens themselves and the agreements surrounding them, noting that the SEC would need to prove that each transaction on Kraken satisfies the Howey Test. Santori expressed confidence that the SEC would fail to meet this burden.
As the case progresses, the implications for Kraken and the broader cryptocurrency industry remain uncertain, particularly as the SEC continues to challenge the classification of various digital assets as securities.
