U.S. crypto exchange Kraken has failed to dismiss the case against it brought by the Securities and Exchange Commission.
“[T]he 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,” U.S. District Judge William H. Orrick wrote in an opinion published Friday in San Francisco federal court.
In his statement, Judge Orrick noted that Kraken earned more than $43 million in revenue from its trading desk between 2020 and 2021, in part by charging a trading fee, and puts few restrictions on how many assets can be bought and sold.
The SEC sued Kraken on Nov. 20, 2023 for operating as an unregistered securities exchange, broker-dealer and clearing agency. The agency also argued the exchange co-mingled customer assets with its own and mishandled customer information.
In particular, the SEC alleges that Cardano’s ADA, Cosmos’s ATOM, Filecoin’s FIL, Solana’s SOL
+4.50%
and Near Network’s NEAR
+12.26%
, among six other tokens, are securities offered by Kraken.
“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,” Judge Orrick wrote, after a lengthy meditation on the so-called Howey test used to determine whether an asset is a security. That test is based off a 1946 U.S. Supreme Court case frequently cited by the SEC, to determine if an asset qualifies as an investment contract and, therefore, a security.
Start your day with the most influential events and analysis
happening across the digital asset ecosystem.
As part of Kraken’s motion to dismiss the case, the exchange argued that the SEC was overreaching its congressionally-approved mandate.
“The SEC does not have the authority to regulate all speculative investments,” the firm’s lawyers wrote.
SEC Chair Gary Gensler has argued since taking office in 2021 that most digital tokens are unregistered securities that should be subject to its oversight. Under his supervision, the securities watchdog has sued some of the world’s largest crypto firms including Binance, Coinbase and Uniswap.
In his opinion, Judge Orrick notes that Binance and Coinbase also failed to dismiss aspects of their SEC lawsuits.
Kraken must respond to the complaint within 20 days, and a trial date will be proposed on Oct. 15 with the original Jan. 14 date being vacated.
Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. Crypto exchange Bitget is an anchor LP for Foresight Ventures. The Block continues to operate independently to deliver objective, impactful, and timely information about the crypto industry. Here are our current financial disclosures.
© 2024 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
