SEC Lawsuit Against Kraken Crypto Exchange To Proceed to Trial

A California Judge has ruled that the SEC’s lawsuit against the Kraken crypto exchange will proceed to trial. The federal regulator sued Kraken in California last year, alleging that the crypto company failed to register with the SEC as a broker, exchange, or clearinghouse.

On August 23, U.S. District Court Judge William H. Orrick of the Northern District of California wrote 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.”

SEC’s Kraken Lawsuit To Proceed To Trial

The SEC’s legal action against Kraken signals an expanding regulatory focus, extending beyond exchanges to specific cryptocurrencies. Notably, Cardano (ADA) and Solana (SOL) should be categorized as securities according to the SEC’s lawsuit.

Kraken motioned to dismiss the SEC lawsuit back in February, but the effort failed. Kraken argued that the SEC had failed to state a claim that the facts in the case, even if true, did not constitute a violation of the law. The exchange added that cryptocurrencies do not meet the definition of security as defined by the Howey Test.

Despite his initial agreement with this point, Judge Orrick says that the case will continue to trial. “Numerous courts have distinguished between the digital assets and the offers to sell them before engaging in an analysis of whether cryptocurrency transactions constitute investment contracts. The distinction is valuable,” Orrick wrote. “Although the way the SEC labels the crypto assets at issue – as ‘crypto asset securities’ – is unclear at best and confusing at worst, I do not understand the SEC to be alleging that the individual cryptocurrency tokens in which Kraken enables transactions are themselves securities.”

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Orrick says that the cryptocurrencies themselves were not securities. However, it does not mean that the purchase and sale of them cannot plausibly be considered an investment contract. “Orange groves are no more securities than cryptocurrency tokens are,” Orrick wrote. “But the contracts surrounding the sale of both may form an investment contract, bringing them within the purview of the [Exchange] Act.”