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A U.S. federal court has denied Kraken’s request to dismiss the lawsuit filed by the U.S. Securities and Exchange Commission (SEC) alleging that Kraken operates an unregistered securities exchange. The development was revealed in a court document dated August 23.
In November, the SEC accused Kraken of “operating its crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agent.”
According to the opinion of the U.S. District Court in Northern California, “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 therefore subject to the securities laws.”
A New Development in the Kraken and Crypto Sector SEC Battle
The decision is seen as a setback in the industry’s ongoing battle with the SEC over which cryptocurrencies qualify as “securities” under U.S. law.
“Once again, the court has confirmed that the framework used for nearly 80 years to define securities is still valid, regardless of the labels used,” an SEC spokesperson said. “Investors in crypto assets offered or sold as securities should receive the same protections as investors in other securities, even if they are traded through intermediaries.”
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The spokesperson noted that crypto trading platforms must register with the SEC and “provide safeguards against fraud and manipulation, prevention of commingling of client assets, and safeguards against conflicts of interest.” “Unless they do so, investors will continue to suffer harm.”
The Aug. 23 decision defines the definition of “security” broadly, looking not only at any formal investment contract, but also at the broader context in which these instruments — in this case, virtual assets — are marketed and sold.
“Contractual formalities are not required for something to qualify as an investment contract and therefore a security,” the court said. “What matters is the totality of the circumstances surrounding a sale, trade or exchange and the investor’s expectations.”
Kraken’s chief legal officer Marco Santori said in a post on the X platform on August 23 that the court had in fact ruled that “legally, no token traded on Kraken is a security.”
“Basically, in the Kraken case, the Court made the same distinction as in the Ripple case: A token is not a security, but agreements around a token can be,” Santori said.
Therefore, the SEC “will have to prove that the Howey Test factors were met for each and every transaction alleged at Kraken. They are not, and we look forward to proving that,” Santori said.
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