American federal judge William H. Orrick has rejected Kraken’s request to dismiss the complaint filed by the SEC, paving the way for a trial that could have major repercussions on the US crypto industry.
The SEC accuses Kraken of operating as an unregistered securities platform and acting as a broker and clearing agency without the necessary licenses, using the Howey test to classify several cryptocurrencies as securities.
Under the leadership of Gary Gensler, the SEC has stepped up its efforts to regulate the crypto market, with lawsuits against several major platforms such as Binance and Coinbase, claiming that most digital tokens are unregistered securities.
Key Accusations Against Kraken
The SEC accuses Kraken of operating as an unregistered securities platform, acting as a broker and clearing agency without the necessary licenses. The federal agency also accuses Kraken of inadequately managing customer funds and information, as well as dangerously mixing the company’s assets with those of its users.
In particular, the SEC argues that several cryptocurrencies available on Kraken, such as Cardano (ADA), Cosmos (ATOM), Filecoin (FIL), Solana (SOL), and the Near Network (NEAR), should be considered securities subject to corresponding regulations.
This position is based on the famous Howey test, a legal criterion derived from a 1946 US Supreme Court decision that determines whether an asset constitutes an investment contract, and therefore a security.
Tribunal’s Response and Implications for Kraken
In his judgment, Judge Orrick stressed that the SEC had presented credible arguments indicating that certain transactions facilitated by Kraken could indeed be classified as investment contracts and fall under securities laws. He also noted that Kraken generated over $43 million in revenue between 2020 and 2021, largely through transaction fees, while imposing few restrictions on the volume of assets bought and sold.
This court decision puts Kraken in a precarious position, similar to other major players in the sector such as Binance and Coinbase, who have also failed to have similar lawsuits filed by the SEC dismissed. The crypto platform must now respond to the allegations within 20 days. A new trial date could be set for October 15, replacing the originally scheduled date of January 14.
Regulatory Context and SEC Strategy
Under the leadership of Gary Gensler, who was appointed as chair of the SEC in 2021, the agency has intensified its efforts to regulate the crypto market. Gensler argues that the majority of digital tokens are unregistered securities and therefore should be subject to strict oversight. Since taking office, the SEC has filed lawsuits against several major cryptocurrency platforms, including Binance, Coinbase, and Uniswap.
Kraken’s attempt to argue that the SEC is exceeding the limits of its legal authority by seeking to regulate all speculative investments did not convince the court.
