Judge Sides with SEC, Dismissing Kraken’s Key Defense in Crypto Suit

The U.S. Securities and Exchange Commission (SEC) secured a partial victory in its case against Kraken. This happened after a California federal judge rejected the exchange’s claim that Congress had not granted the agency authority over cryptocurrency regulation.

The U.S. District Judge William Orrick has dismissed Kraken’s “major questions doctrine” defense in its legal battle with the SEC.

This lawsuit was filed by the SEC against Kraken in November 2023. They accused the crypto exchange of offering unregistered securities and operating as an unregistered exchange since 2018.

The judge’s January 24 ruling marks a partial victory for the SEC, reinforcing its authority over the crypto industry. It also challenges the notion that Congress hadn’t explicitly granted such powers to the agency.

This decision comes amid heightened regulatory scrutiny of crypto platforms. As major players like Coinbase, Ripple, and Binance are also facing similar lawsuits.

Judge Sides with the SEC

The “major questions doctrine” contends that federal agencies cannot claim powers not clearly delegated by Congress. Kraken argued that the SEC overstepped its authority in targeting the crypto sector.

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However, Judge Orrick dismissed this defense, stating that the SEC’s actions did not constitute,

“Highly consequential power beyond what Congress could reasonably be understood to have granted.”

Judge Orrick emphasized that cryptocurrency, while a growing financial instrument, has not yet reached the level of economic significance comparable to industries like energy or student loans, which have previously invoked the doctrine.

This interpretation weakens the defense for Kraken and potentially sets a precedent for other crypto-related lawsuits.

Despite this setback, Kraken retains its “fair notice” defense, arguing that the SEC has failed to provide sufficient clarity about which crypto transactions violate securities laws. Judge Orrick acknowledged that Kraken had plausibly alleged this lack of notice, a key aspect of due process.

For the SEC to prevail on this front, it must demonstrate that Kraken—or any reasonable entity in a similar position—should have known that the Howey Test applied to secondary market transactions on its platform, classifying them as investment contracts. As of now, the SEC has not satisfied this burden of proof.

Ongoing Legal Challenges for Kraken

The SEC’s lawsuit accuses Kraken, operated by Payward Inc. and Payward Ventures, of violating securities laws for more than five years.

The SEC’s lawsuit against Kraken has moved through several phases, beginning with a federal court’s decision in August to deny Kraken’s attempt to dismiss the case.

In September, Kraken responded by challenging the SEC’s accusations, disputing the claims of securities law violations.

This case is part of a broader SEC effort targeting multiple cryptocurrency exchanges. To navigate the complexities of regulating digital assets, the agency has formed a specialized crypto task force led by Commissioner Hester Peirce, a prominent advocate for the crypto sector.

As Kraken prepares its next steps, this case serves as a critical test for the relationship between crypto exchanges and regulatory authorities. With billions at stake and growing institutional interest in cryptocurrencies, the outcome could shape the future of the industry’s regulatory environment.