SEC vs. Kraken: a legal battle over crypto asset classification

In the ongoing legal battle between the Securities and Exchange Commission (SEC) and Kraken, a prominent cryptocurrency exchange, the question of whether digital assets traded on Kraken should be classified as securities has taken centre stage.

Kraken’s legal team has challenged the notion that the exchange serves as a platform for trading crypto asset securities, leading them to seek a dismissal of the lawsuit. However, the presiding federal court judge has expressed a tendency to reject Kraken’s dismissal motion.

The legal representatives of both parties convened to discuss Kraken’s dismissal motion. Matthew Solomon, representing Kraken, and Peter Moores, the SEC’s counsel, presented their arguments before Judge Orrick. The hearing took place on June 20 in the US District Court for the Northern District of California.

Courtroom confrontation

Kraken had filed a motion to dismiss the SEC’s lawsuit against the company in February 2024. Solomon highlighted inconsistencies between the SEC’s lawsuits against Kraken and other companies, such as Terraform and Telegram. He also referenced the SEC vs. Ripple case and Judge Analisa Torres’ ruling, which deemed XRP a security only when sold to institutional investors. Solomon suggested that the SEC’s case against Coinbase provides the closest parallel to Kraken’s situation.

In response, Moores, the SEC’s counsel, argued that Kraken primarily functions as an ecosystem facilitating the sale of investment contracts. He asserted that, according to the Howey test, Kraken’s activities fit the definition of securities. Kraken’s legal team contested this interpretation, arguing that the SEC should not rely solely on the Howey test but should demonstrate that Kraken has brokered, traded, or cleared securities.

Judge Orrick did not issue a ruling following the presentations. However, he indicated a potential inclination to deny Kraken’s dismissal motion, suggesting it was plausible that Kraken had offered and sold digital assets as investment contracts. He also noted that a year should suffice for the discovery phase to determine the course of the case.

Dismissal motion under scrutiny

The SEC’s legal actions against Kraken began in early 2023 when the regulator alleged that the exchange’s staking program constituted an offering of unregistered securities. Kraken agreed to a $30 million settlement and suspended its staking program. The SEC took further action against Kraken in November 2023, accusing the exchange of operating as an unregistered exchange, dealer, broker, and clearing platform.

The legal battle continues, with the recent dismissal motion filed by Kraken awaiting the judge’s decision.