Judge Denies Crypto Exchange Kraken’s Motion to Dismiss SEC Lawsuit

On Friday, August 23, 2024, the U.S. District Court, Northern District of California denied cryptocurrency exchange Kraken’s motion to dismiss a case brought against it by the U.S. Securities and Exchange Commission.

The SEC filed a lawsuit against Kraken on November 20, 2023, alleging that the exchange operated as an unregistered securities exchange, broker-dealer, and clearing agency. The regulatory agency also claimed Kraken mishandled customer assets and information. Kraken sought to have the case dismissed, but Judge William H. Orrick ruled that the SEC plausibly argued that certain transactions on Kraken’s platform qualify as securities.

In its complaint, the SEC identified specific cryptocurrencies traded on Kraken, such as Cardano’s ADA, Cosmos’s ATOM, Filecoin’s FIL, Solana’s SOL, and Near Network’s NEAR, as meeting the definition of securities. Judge Orrick referred to the Howey test, established by the 1946 Supreme Court case SEC v. W.J. Howey Co., in determining whether transactions qualify as investment contracts and hence securities.

Kraken had earned over $43 million in revenue from fees between 2020 and 2021 despite imposing few restrictions on trading. The exchange argued that the SEC overstepped its authority in seeking to regulate speculative digital token investments. However, SEC chairman Gary Gensler has maintained that most cryptocurrencies should be subject to SEC oversight as unregistered securities.

With its motion to dismiss denied, Kraken now has 20 days to respond to the SEC’s complaint. A trial date has been set for October 15, 2024, replacing the original January 14, 2025 date. Kraken’s Chief Legal Officer Marco Santori stated the ruling highlights the need for Congress to provide more regulatory clarity around digital asset markets.

The case against Kraken is part of the SEC’s broad crackdown on cryptocurrency trading platforms.

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