Kraken Faces SEC Lawsuit

U.S. crypto exchange Kraken has failed to dismiss the Securities and Exchange Commission (SEC) case against it.

U.S. District Judge William H. Orrick stated, “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.”

Judge Orrick indicated that Kraken earned over $43 million in revenue from its trading desk between 2020 and 2021, by charging trading fees and imposing minimal restrictions on the volume of assets traded.

The SEC initiated the lawsuit against Kraken on Nov. 20, 2023, for operating as an unregistered securities exchange, broker-dealer, and clearing agency. Additionally, the agency claimed that Kraken co-mingled customer assets with its own and mishandled customer information.

The SEC specifically identifies tokens such as Cardano’s ADA, Cosmos’s ATOM, Filecoin’s FIL, Solana’s SOL, and Near Network’s NEAR, among others, as securities offered by Kraken.

Judge Orrick elaborated on the Howey test, derived from a 1946 U.S. Supreme Court case, used to determine whether an asset qualifies as an investment contract and thus a security.

In its motion to dismiss, Kraken contended that the SEC was overstepping its congressionally-approved authority, asserting, “The SEC does not have the authority to regulate all speculative investments.”

SEC Chair Gary Gensler has maintained that most digital tokens are unregistered securities subject to SEC oversight. His tenure has seen lawsuits against major crypto players like Binance, Coinbase, and Uniswap.

Judge Orrick noted that Binance and Coinbase also did not succeed in dismissing parts of their SEC lawsuits.

Kraken is required to respond to the SEC complaint within 20 days. A trial date will be proposed on Oct. 15, after the initial Jan. 14 date was vacated.

Marco Santori, Kraken’s Chief Legal Officer, commented on social media, asserting that the ruling shows the SEC should not regulate the crypto industry solely through enforcement. The crypto industry has long criticized the SEC for its enforcement actions and opaque regulations, arguing the need for clearer rules.

Santori emphasized, “To deliver clarity to the industry, protect consumers, and foster blockchain technology growth, Congress must pass a comprehensive market structure framework.”

Update: Aug. 23, 9:10 p.m. UTC to include comments from Santori.