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A California federal judge has dismissed some of Kraken’s defenses in an ongoing legal battle with the U.S. Securities and Exchange Commission (SEC), granting the agency some, though not all, of what it sought in a request to kick Kraken to the curb. The allegations involve the offering of unregistered securities by the crypto exchange.
Judge William Orrick ruled that Kraken’s invocation of the “major questions doctrine” could not stand. Quite simply, this doctrine, one that is often invoked by crypto firms like Coinbase, Ripple, and Binance in similar cases, contends that federal agencies are only permitted to exercise the powers explicitly delegated to them by Congress.
Kraken Retains ‘Fair Notice’ Defense Amid SEC Allegations
In his ruling, Judge Orrick said, the SEC is not asserting a highly consequential power beyond what Congress could reasonably be understood to have granted it. But cryptocurrency may not be considered so economically consequential as such energy or student loans sectors once were, he added, because cryptocurrency is an embryonic financial instrument.
While he rejected the major questions defense, Judge Orrick also upheld the ‘fair notice’ argument where Kraken is concerned. In response, the SEC also alleges that the exchange did not give it sufficiently advanced notice that its actions violated the securities laws and could constitute a due process violation.
The judge said the SEC would have to show that any ‘ordinary entity in Kraken’s position would understand that the Howey test, as it applied to the secondary market transactions on Kraken’s platform, shows that such market transactions constitute investment contracts. Judge Orrick said:
“It has not made such a showing.”
SEC’s Broader Push to Regulate Cryptocurrency Platforms Intensifies
Since 2018, Kraken and its operating entities, Payward Inc. and Payward Ventures, have operated as an unregistered securities exchange and we now allege that the SEC and NFA claims are valid, the SEC filed suit against Kraken in November 2023. In August, the company successfully opposed the SEC’s motion to dismiss its case, allowing it to continue to dispute the SEC’s claims in future filings.
The action is one part of the SEC’s broader effort to control cryptocurrency platforms to understand whether it should extend a bit of a welcome to a digital asset world that is becoming more and more digital. Under the leadership of Commissioner Hester Peirce, the SEC created its specialist crypto task force.
The case against Kraken points to the SEC’s struggle to determine whether it considers itself in charge of governing the crypto world. Their fate could influence how other major platforms in the U.S. cryptocurrency business are regulated in the future, given that other platforms are caught up in similar legal scrutiny too.
There are high stakes for the whole industry as a legal win for crypto exchanges and losses for the regulators could set the tone for the industry’s relationship with regulators in the near future.
Conclusion
This is a crucial moment for Kraken regarding who will oversee cryptocurrency, as the SEC’s case against the crypto exchange enters its second week. Under challenge from key defenses, the outcome could have far-reaching implications for the industry and may even set a precedent for how digital assets will be governed in the US.
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FAQs
Why is the SEC suing Kraken?
The SEC claims Kraken has offered unregistered securities and has operated as an unregistered exchange since 2018.
What is the major question doctrine?
It limits agency powers unless specifically granted by Congress. Kraken’s use of this defense was dismissed.
What defense did Kraken retain?
The court upheld Kraken’s “fair notice” defense, citing insufficient clarity from the SEC.
How does this affect other crypto firms?
The case could set regulatory precedents for the crypto industry, impacting firms like Coinbase and Binance.
