A US federal judge has denied crypto exchange Kraken’s request to dismiss the lawsuit filed by the Securities and Exchange Commission (SEC) over allegations of operating an unregistered securities exchange, despite Kraken’s argument that the SEC’s allegations are unfounded. The decision comes after Kraken requested a dismissal of the case filed by the SEC in November. The regulator’s complaint accused the exchange of operating an unregistered securities exchange, broker, dealer, and clearing agency. The regulator also accused the crypto exchange of illegally facilitating the trading of securities, earning hundreds of millions of dollars in the process since 2018.
SEC Allegations and Kraken’s Defense
The SEC claims that Kraken has prevented customers from receiving protections such as regulatory inspections, safeguards against conflicts of interest, and compliance with recordkeeping requirements by allegedly failing to register as a security broker. Kraken, in its motion to dismiss the case, argued that the SEC’s allegations against the company are unfounded and based on a flawed interpretation of securities laws. The exchange contended that the SEC is attempting to apply outdated regulatory frameworks to the rapidly evolving crypto industry without clear guidelines. The exchange emphasized that its staking services, which are at the center of the SEC’s case, do not constitute an unregistered securities offering, as the regulator claims.
However, Judge William H. Orrick ruled in favor of the SEC and rejected the exchange’s motion to dismiss. He 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.” The ruling aligns with SEC Chair Gary Gensler’s stance that most digital tokens are unregistered securities subject to SEC oversight. The case, officially titled Securities and Exchange Commission v. Payward Inc., will proceed in the US District Court for the Northern District of California.
Kraken and the SEC have not yet responded to requests for comment as of press time. Notably, this setback in court comes as Kraken reportedly plans to raise $100 million in a final funding round before an eventual initial public offering (IPO) in 2025. Kraken also lost a case filed by the Australian securities watchdog on Aug. 23. According to the Australian Federal Court decision, Bit Trade Pty — which operates the Kraken exchange in the country — failed to adequately distribute its margin trading products within Australian Securities and Investments Commission (ASIC) rules. Both parties now have seven days to agree on declarations and injunctions, with ASIC already stating that it intends to seek financial penalties against Bit Trade.
While Kraken may have believed that the SEC’s allegations were unfounded, the judge’s ruling in favor of the SEC shows that there are serious implications for the crypto exchange. The case underscores the regulatory challenges faced by companies operating in the rapidly evolving crypto industry and highlights the importance of compliance with securities laws to avoid legal consequences. Kraken’s future actions and decisions will be closely scrutinized as it navigates through this legal battle with the SEC.