Crypto Exchange Kraken Faces Uphill Battle in Bid to Dismiss SEC Lawsuit

News | July 5, 2024 By:

On Thursday, June 20, 2024, U.S. District Judge William H. Orrick of the Northern District of California heard arguments in the securities fraud lawsuit brought by the U.S. Securities and Exchange Commission (SEC) against cryptocurrency exchange Kraken. At the start of the hearing, Judge Orrick signaled that Kraken faced an uphill battle in getting the case dismissed, as he said he was “inclined to deny” Kraken’s motion to dismiss.

The SEC has accused Kraken of illegally operating as an unregistered securities exchange, broker, dealer and clearing agency. Kraken argues that the digital assets traded on its platform are not investment contracts and therefore not securities. However, Judge Orrick questioned this argument, stating that the term “investment contract” outlined in the 1946 Supreme Court Howey test is broader than Kraken suggested. He added that in determining whether something is an investment contract, one must also consider how the platform on which assets are offered and sold operates. In the case of Kraken, Judge Orrick said it appears the platform meets the definition of an investment contract.

Kraken’s lawyer, Matthew Solomon of Cleary Gottlieb Steen & Hamilton LLP, said he understood the challenge but firmly believes the case should be dismissed. He argued that secondary market trading on Kraken does not satisfy the Howey test’s criteria for what constitutes an investment contract. Solomon stated that Kraken simply facilitates anonymous secondary market purchases between parties and does not directly exchange, broker, or deal the assets.

However, SEC lawyer Peter Moores asserted that the transactions in question do fall under securities laws, citing a recent related case. He also argued that Kraken is trying to improperly remove resale investment contracts from securities protections. Moores said existing case law like Hocking v Dubois does not actually support Kraken’s claim that investment contracts concluded in primary market do not persist in secondary market resales.

While Judge Orrick did not issue an immediate ruling, he signaled skepticism toward Kraken’s arguments. He told Solomon “you’ve got your work cut out for you” to change his preliminary view. A final decision is pending further consideration from the court.