Judge Denies Dismissal in SEC Lawsuit

In a legal battle between SEC vs Kraken, the U.S. SEC has won a crucial battle in its ongoing lawsuit against Kraken, a major U.S.-based cryptocurrency exchange. On Friday, Judge William Orrick of the Northern District of California ruled that the SEC vs Kraken case could proceed, denying the exchange’s motion to dismiss the lawsuit.

Let’s understand the ruling!

Eleanor Terrett Highlights “Double Blow” to Kraken

Eleanor Terrett, a journalist at Fox Business, highlighted that this ruling dealt a “double blow” to Kraken. The judge not only rejected Kraken’s motion to dismiss but also found the SEC’s argument valid that the crypto tokens sold on Kraken’s platform were offered or sold as investment contracts. This aligns with the Howey Test, a key legal standard used to determine whether a transaction qualifies as an “investment contract,” and thus, a security under U.S. law.

SEC’s Authority Affirmed Despite Kraken’s Arguments

This ruling is a notable victory for the SEC, which has been asserting its authority to regulate cryptocurrencies under existing powers granted by Congress. Kraken’s parent company, Payward, Inc., had argued that the SEC’s actions overstepped its authority, invoking the Supreme Court’s “major questions doctrine,” which limits regulatory agencies from making decisions with vast economic impact without clear congressional authorization.

However, Judge Orrick dismissed this argument, stating that the SEC’s cryptocurrency regulation does not meet the threshold of impacting the economy significantly enough to trigger the major questions doctrine. His point was that the Supreme Court only uses this theory in cases with major economic impacts, which he did not believe applied to the cryptocurrency market at this stage.

Key Legal Question: Are Crypto Assets Securities?

But what matters is whether the crypto assets traded on Kraken’s platform can be classified as securities, thus falling under the SEC’s regulatory reach. While the judge did not make a definitive ruling, he found the SEC’s arguments convincing to grant further judicial review. He referenced a prior Ninth Circuit ruling, which suggested that security could be defined not by a specific certificate but by a broader “scheme” of profit-seeking activities.

SEC’s Stance

The SEC has argued that trading platforms like Kraken should be required to register and implement safeguards against fraud and market manipulation, underscoring the agency’s commitment to regulating the crypto industry.

What’s Next for the SEC and Cryptocurrency Exchanges?

The SEC is expected to continue its aggressive stance against other crypto exchanges. The agency is involved in multiple legal battles, including an expanded case against Binance and a similar lawsuit against Coinbase, where it recently won a motion to dismiss. As the SEC continues to push for tighter regulation, the outcomes of these cases could have far-reaching implications for the future of the cryptocurrency industry in the United States.