A US federal judge has denied crypto exchanges Kraken’s request to dismiss the lawsuit filed by the Securities and Exchange Commission (SEC) over allegations of operating an unregistered stock exchange, Bloomberg News reported on August 23.
The decision comes after Kraken asked a dismissal of the case submitted by the SEC in November. The supervisor’s complaint accused the exchange of operating an unregistered stock exchange, broker, dealer and clearing agency.
The regulator also accused the crypto exchange of illegally facilitating securities trading, which has made hundreds of millions of dollars since 2018.
For example, the SEC alleges that Kraken prevented customers from receiving protections such as regulatory inspections, safeguards against conflicts of interest, and compliance with record-keeping requirements by allegedly failing to register as a security broker.
Case continues
Kraken argued in its motion to dismiss the case that the SEC’s allegations against the company are baseless and based on a flawed interpretation of the securities laws. The exchange alleged that the SEC is trying to apply outdated regulatory frameworks to the fast-evolving crypto industry without clear guidelines.
The exchange emphasized that its staking services, which are at the center of the SEC’s case, do not constitute an unregistered securities offering, as the regulator claims.
However, Judge William H. Orrick ruled in favor of the SEC and denied the exchange’s motion to dismiss. He stated:
“The SEC has plausibly asserted that at least some of the cryptocurrency transactions Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to the securities laws.”
The ruling is consistent with SEC Chairman Gary Gensler’s position that most digital tokens are unregistered securities subject to SEC supervision. The case, officially titled Securities and Exchange Commission v. Payward Inc., will be heard in the U.S. District Court for the Northern District of California.
Kraken and the SEC have not responded to requests for comment as of press time.
This setback in court comes mainly as Kraken reportedly plans to raise $100 million in a final funding round before a possible initial public offering (IPO) in 2025.
Kraken vs ASIC
Cracking too lost a case filed by Australia’s securities watchdog on August 23.
According to the Australian Federal Court’s decision, Bit Trade Pty – which operates the Kraken exchange in the country – failed to adequately distribute its margin trading products within the rules of the Australian Securities and Investments Commission (ASIC).
ASIC alleged that Bit Trade has been offering “margin expansion” without compliance since October 5, 2021, in breach of s994B(2) of the Corporations Act whenever the product was made available to a customer.
Both sides now have seven days to agree declarations and orders, with ASIC having already stated that it intends to seek financial sanctions against Bit Trade.