Kraken Faces Trial as Judge Denies Motion to Dismiss SEC Lawsuit

In a significant development for the cryptocurrency industry, a California judge has ruled that the lawsuit filed by the Gary Gensler-led Securities and Exchange Commission (SEC) against the cryptocurrency exchange Kraken will move forward to trial. This decision sets the stage for another high-stakes legal battle between a prominent blockchain-based company and the federal regulator.

The SEC’s case against Kraken, which was initiated last November in the Northern District of California, accuses the trading platform of violating federal securities laws by failing to register as a broker. This is a charge similar to those brought by the SEC against other major cryptocurrency exchanges, including Binance and Coinbase.

In a report published by CoinDesk on Monday, U.S. District Court Judge William H. Orrick denied Kraken’s motion to dismiss the SEC’s lawsuit. Judge Orrick stated that 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 marks a significant moment in the ongoing regulatory scrutiny of cryptocurrency platforms.

However, the judge did grant Kraken a partial victory by agreeing with the company’s argument that the cryptocurrencies named in the SEC’s lawsuit are “not themselves securities.” Despite this, the way these assets are bought and sold on the platform may bring them under the jurisdiction of federal securities laws.

The SEC is seeking to permanently bar Kraken from further violations of securities laws and is demanding the disgorgement of “ill-gotten gains,” along with other civil penalties. This lawsuit is part of a broader crackdown by the SEC on major cryptocurrency exchanges. In June 2023, the SEC sued Binance and its founder, Changpeng Zhao, alleging deceptive tactics, conflicts of interest, and evasion of the law. Earlier in the year, Coinbase received a Wells notice from the SEC, sparking concerns over the agency’s aggressive stance toward the cryptocurrency market.

Both Binance and Coinbase, two of the world’s largest cryptocurrency exchanges, have opted to challenge the SEC’s claims in court. Judicial rulings earlier this year denied their motions to dismiss the cases, setting the stage for trials that could have far-reaching implications for the industry.

With the 2024 U.S. presidential election approaching, the future of cryptocurrency regulation remains a hot topic. Investors are closely watching how candidates, including former President Donald Trump and current Vice President Kamala Harris, will approach crypto regulation. Trump has expressed ambitions to make the U.S. “the crypto capital of the planet,” proposing initiatives such as establishing a U.S. bitcoin reserve, creating a crypto advisory council, and appointing crypto-friendly regulators.

As Kraken prepares for its legal battle, the case underscores the ongoing tensions between the rapidly evolving cryptocurrency sector and regulators determined to impose traditional financial oversight on this new frontier but as with any innovation that should require some regulation, there may be the need of a new age regulator for a new age of finance, laws dating back to the 1930’s may not fully apply to this digital future.

James Cullen
Digital Assets Desk