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Kraken’s Legal Battle with the SEC Continues
Regulation | Aug 26, 2024
Image: AI Freepik
Kraken's Request to Dismiss SEC Case Denied, Judge Allows Case to Go To Court
Judge William Orrick recently dismissed Kraken's request to have the case dismissed, allowing the SEC's lawsuit against the company to proceed. The SEC claims that by allowing the trading of tokens like Cardano (ADA) and Solana (SOL) that the SEC in fact deems as securities, Kraken has been operating as an unregistered securities exchange. This case is prominent and could impact the future laws governing crypto in the US, especially given that Kraken is one of the largest centralized digital asset exchanges in the world.
Key Takeaways
1. The SEC's Authority and the Howey Test
According to the judge, the SEC has made credible claims that some crypto transactions made possible by Kraken would meet the criteria for "investment contracts" under the Howey Test and be regarded as securities. Although the court has not yet made a decision, it made clear that Kraken's operations may be subject to SEC regulatory monitoring and warrants more investigation as to whether or not operations qualify as securities trading.
See: SEC Files Lawsuit and Accuses Kraken of Commingling
Also of interest, the court stated that an 'investment contract' does not require a formal agreement under the Howey Test. Conversely, it's focused more on the wider context of the transaction such as the investor's 'reasonable expectations' and how the deal was presented.
3. No Major Questions Doctrine
Legal counsel for Payward Inc., the parent company of Kraken Exchange, had submitted a motion that the case triggered a "major questions doctrine," which restricts the power of regulatory bodies to make significant judgments in the absence of the approval of congress. However, the judge dismissed this claim stating that crypto's impact on the economy would have to be much larger than it currently is (think large enough to affect the financial stability of the economy) to apply this rule.
4. Implications and Reactions
The decision to proceed to court is consistent with prior SEC measures taken against Coinbase and Binance, indicating that the SEC will keep advocating for further regulation of the crypto sector. The SEC's efforts to regulate digital assets may be strengthened even more by the court's decision to allow the case to proceed, particularly if it is shown that Kraken broke any securities laws.
See: Kraken’s Strategy for Canadian Market Growth
Marco Santori, Kraken's Chief Legal Officer, stated that Kraken doesn't think the tokens that are exchanged on its platform qualify as securities. He emphasized that Kraken intends to contest the Howey Test requirements in court, and the SEC will have to demonstrate that each transaction satisfies them.
Closing Outlook
Following the ruling, market reactions have been mixed.If the court sides with the SEC, it will lead to stricter requirements for all cryptocurrency exchanges.
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