Kraken's Legal Battle with SEC Moves to Trial After Judge Denies Dismissal

A recent ruling by a California judge has paved the way for the U.S. Securities and Exchange Commission’s (SEC) lawsuit against Kraken to proceed to trial. The SEC initially filed the lawsuit in November, accusing the cryptocurrency exchange of failing to register as a broker, clearinghouse, or exchange, thereby violating federal securities laws. The agency is seeking a permanent injunction against Kraken, alongside disgorgement of profits and other civil penalties.

This legal battle places Kraken among a growing list of major crypto exchanges facing SEC scrutiny. Last year, similar lawsuits were filed against Binance and Coinbase, alleging similar violations. Both companies sought to have their cases dismissed, but the courts allowed the cases to move forward. Kraken’s attempt to dismiss the lawsuit was also recently denied.

On August 23, U.S. District Court Judge William H. Orrick ruled that the SEC had sufficiently argued that certain cryptocurrency transactions facilitated by Kraken could be classified as investment contracts, thus falling under securities law. Kraken’s defense had contended that cryptocurrencies should not be considered securities, but the judge found that while the digital assets themselves may not be securities, the transactions involving them could be interpreted as investment contracts.

Kraken’s Chief Legal Officer, Marco Santori, highlighted a portion of Orrick’s ruling on social media, noting that the court had recognized that the tokens traded on Kraken are not securities. Santori viewed this as a victory for Kraken and the broader crypto community. However, Orrick’s ruling also emphasized that while the assets themselves are not securities, the contracts surrounding their sale might be, which could still bring them under the SEC’s jurisdiction.

Additionally, Kraken’s argument that the case should be dismissed under the Major Questions Doctrine, which limits regulatory agency power expansion without explicit congressional authorization, was rejected by Judge Orrick. He reasoned that the cryptocurrency industry, despite its rapid growth, does not yet warrant such a consideration under this legal principle.

Both the SEC and Kraken are now required to submit a Joint Statement by October 8, which will outline the proposed schedule and trial date, setting the stage for what could be a landmark case in the evolving legal landscape surrounding cryptocurrency regulation in the United States.