Judge Signals Against Dismissal in SEC vs. Kraken Case

Attorneys for Kraken and the U.S. Securities and Exchange Commission (SEC) recently presented opposing arguments to a federal judge on whether digital assets on the crypto exchange could be classified as securities. The hearing, which took place on June 20 in the U.S. District Court for the Northern District of California, featured Matthew Solomon representing Kraken and Peter Moores representing the SEC. They met before Judge William Orrick to discuss Kraken’s motion to dismiss a case filed by the SEC in February. Judge Orrick indicated that he was “inclined to deny” the motion, observing that it was “plausible” digital assets could be considered investment contracts on the platform.

During the proceedings, Solomon pointed out significant differences between the SEC’s cases against Kraken and those against Terraform Labs and Telegram. He mentioned Judge Analisa Torres’ decision in the SEC’s lawsuit against Ripple Labs, where it was ruled that XRP was a security when sold to institutional investors, but argued that the case most comparable to Kraken’s was Coinbase’s.

The SEC argued that Kraken operated as an “ecosystem” in which tokens were sold as investment contracts or “concepts”, thus making them securities based on the Howey test. Kraken’s legal team contested this characterization, arguing the rules should be applied consistently across the board.

“I think conjuring up the notion of an ecosystem just for crypto — that’s not the way rules oughta be applied,” Solomon contended. “Crypto deserves no better than anybody else, but they oughta have the rules applied equally to them as they’ve applied to everyone else.” He added that the SEC needed to prove not just the existence of a security under the Howey test, but also that the security was brokered, traded, or cleared on Kraken, which he argued was impossible based on the SEC’s current framework.

Judge Orrick did not make an immediate ruling on the motion to dismiss but suggested he was still inclined to deny it after hearing the arguments. He also mentioned that a year would be a sufficient timeframe for discovery if the case proceeds.

The SEC initially filed its enforcement action against Kraken in November 2023. Prior to this, Kraken had settled with the SEC in February 2023, agreeing to pay $30 million and to halt its staking services and programs for U.S. clients.

Although Ether (ETH) was not specifically mentioned in the SEC’s case against Kraken, the token has been a central point of contention between various crypto firms and the SEC. Reports from March indicated that the SEC was considering designating ETH as a security and potentially taking enforcement actions against companies dealing with the token.

In April, blockchain firm ConsenSys filed a lawsuit against the SEC after receiving a Wells notice indicating a possible enforcement action related to Ether. The SEC concluded its investigation on June 19, implying that it viewed Ether as a commodity rather than a security.

As the legal battles continue, Kraken and other crypto firms await further clarity and rulings that could significantly impact the landscape of digital asset regulation. Regardless of the outcome, the ongoing disputes highlight the regulatory uncertainties that continue to challenge the cryptocurrency industry.