Judge Orrick ruled that Kraken’s crypto transactions could qualify as securities under the SEC’s Howey test.
Kraken must now face discovery, with the SEC arguing that certain tokens on its platform, like ADA and SOL, are securities.
Despite claiming its tokens aren’t securities, Kraken's legal battle continues after its motion to dismiss the SEC lawsuit was denied.
Kraken, a U.S.-based cryptocurrency exchange, failed in its attempt to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC). The case centers around allegations that Kraken operated as an unregistered securities exchange, broker-dealer, and clearing agency.
Notably, U.S. District Judge William H. Orrick ruled that the SEC plausibly argued that certain cryptocurrency transactions facilitated by Kraken could be considered investment contracts, and therefore securities.
https://twitter.com/CryptooIndia/status/1827209899064930412 Judge Orrick’s Analysis of the Case
Judge Orrick emphasized that the SEC’s case relies on the Howey test, a long-standing legal principle used to determine whether an asset qualifies as a security. In his decision, he pointed out that the cryptocurrency market might be novel, but the principles guiding the SEC's regulatory actions are rooted in established law.
He highlighted the exchange's revenue from trading activity, stating Kraken earned over $43 million between 2020 and 2021. Furthermore, the judge noted that Kraken imposed minimal restrictions on the number of assets traded, reinforcing the SEC's argument that the exchange’s activities could involve securities. However, despite these findings, Kraken must continue defending itself against the claims.
Kraken’s Position and SEC’s Broader Actions
Kraken has consistently maintained that none of the tokens it offers on its platform are securities. In its motion to dismiss, Kraken’s lawyers argued that the SEC lacked the authority to regulate speculative investments as securities.
Despite this stance, the court permitted the case to proceed to discovery. This decision aligns with similar rulings in ongoing SEC lawsuits against major exchanges like Binance and Coinbase, where motions to dismiss were also denied.
SEC’s Focus on Specific Tokens
The SEC’s lawsuit against Kraken targets various tokens, including Cardano’s (ADA), Solana’s (SOL), and Cosmos’s (ATOM). The agency claims these tokens meet the criteria of investment contracts, making them securities under federal law.
Judge Orrick's ruling highlights that while a token itself may not always be a security, agreements surrounding token transactions could potentially qualify under the Howey test. As a result, the case will move forward, requiring the SEC to demonstrate that the transactions facilitated by Kraken meet the criteria for securities.
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