A United States federal court has denied Kraken’s motion to dismiss a lawsuit brought by the Securities and Exchange Commission (SEC), which alleges that the crypto exchange is operating as an unregistered securities exchange. The decision, issued on August 23, marks a significant development in the ongoing legal battle between the SEC and the cryptocurrency industry.
Background of the SEC’s Allegations
The SEC filed charges against Kraken in November, accusing the platform of functioning as an unregistered securities exchange, broker, dealer, and clearing agency. The lawsuit contends that Kraken facilitates cryptocurrency transactions that the SEC argues qualify as investment contracts, thereby falling under the purview of securities laws.
According to the court’s opinion from the US District Court in Northern California, “The 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.” This ruling allows the SEC’s lawsuit to proceed, representing a setback for Kraken and the broader cryptocurrency industry, which has long been at odds with the SEC over the classification of digital assets.
Implications for the Crypto Industry
The court’s ruling reinforces the SEC’s stance that traditional securities regulations apply to digital assets, despite the industry’s arguments to the contrary. An SEC spokesperson emphasized that the legal framework used to identify securities, established nearly 80 years ago, still applies to cryptocurrencies. “Investors in crypto assets offered or sold as securities should get the same protections as investors in other securities, even when they are traded using intermediaries,” the spokesperson said.
The court’s decision highlights an expansive interpretation of what constitutes a “security,” focusing not only on formal investment contracts but also on the broader context in which these assets are marketed and sold. The court stated, “Contractual formalities are not required for something to qualify as an investment contract, and therefore a security. What counts is the totality of the circumstances surrounding a sale, trade, or exchange, and the expectations of the investor.”
Kraken’s Response and Future Legal Battle
Despite the ruling, Kraken’s Chief Legal Officer, Marco Santori, highlighted a critical aspect of the decision in an August 23 post on the X platform. He noted that the court “ruled, as a matter of law, that none of the tokens trading on Kraken are securities.” Santori explained that while the court acknowledged that a token itself may not be a security, the agreements surrounding its sale or trade could qualify as such. This distinction echoes a similar ruling in the Ripple case, where the court found that the token itself was not a security, but certain sales of it could be.
Santori further argued that the SEC would need to prove, for each alleged transaction on Kraken, that the factors of the Howey Test—a test used to determine what constitutes an investment contract—are met. He expressed confidence in Kraken’s position, stating, “They aren’t, and we look forward to proving this.”
Broader Industry Impact
Kraken’s legal challenges are part of a broader pattern of SEC actions against cryptocurrency exchanges. Coinbase, another major player in the crypto space, is also facing a lawsuit from the SEC over its virtual asset staking products, which the SEC claims constitute an unlawful securities offering. In addition, the SEC recently rejected an application from Cboe Global Markets to list Solana exchange-traded funds, arguing that SOL, Solana’s native token, is a security.
The court’s denial of Kraken’s motion to dismiss does not represent a final ruling but indicates that the SEC’s claims are considered plausible enough to proceed to trial. As the case continues, it could set important precedents for how cryptocurrencies and related services are regulated in the United States.
