In a major setback for Kraken, a California district court judge has denied the exchange’s attempt to appeal an earlier decision that allowed the SEC’s lawsuit to proceed. Judge William Orrick ruled on Nov. 18 that Kraken’s motion for summary judgment would only delay the lawsuits without furthering their resolution.
The SEC alleges that Kraken sold unregistered securities by trading and selling crypto assets, which the regulator says qualify as investment contracts under the Howey test. Going into details, the SEC broadly alleged that Kraken allows trading in crypto assets such as ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG and SOL, claiming that these are investment contracts subject to securities legislation. .
Judge Orrick upheld this position, stating that the SEC had sufficiently demonstrated its allegations and that discovery would be necessary to fully assess whether Kraken’s operations meet all elements of the Howey test.
Kraken’s legal arguments rejected
In September, Kraken requested permission to appeal the August ruling denying the request to dismiss the SEC case. The exchange argued that there were unresolved questions about whether an investment contract requires formal agreements or post-sale obligations. It also argued that there was room for different interpretations of the securities laws, which a higher court would have to address.
However, Judge Orrick rejected these arguments, noting that no court since Howey has held that contractual formalities or post-sale obligations are conditions of an investment contract. He further emphasized that several courts have already refuted Kraken’s legal position.
SEC tightens its case
The SEC recently moved to address three of Kraken’s defenses, claiming that existing laws clearly define investment contracts and gave Kraken sufficient notice of compliance requirements. The regulator argued that Kraken’s defense could lead to irrelevant and burdensome discovery efforts, which Judge Orrick appeared to take into account in his ruling.
Kraken vs. SEC
The SEC’s lawsuit, filed in November 2023, accuses Kraken of failing to register as an exchange, broker, dealer or clearing agency. The ongoing lawsuit will determine whether Kraken’s crypto activities violate securities laws – a ruling that could have far-reaching consequences for the broader crypto industry.
What now?
Moreover, despite the regulatory issues, Kraken plans to launch its own blockchain ‘Ink’ in early 2025, to cater to both private and institutional users.
Kraken has not yet issued a public response to the judge’s latest decision. As the case progresses, it remains a pivotal legal battle in the SEC’s broader enforcement efforts against crypto platforms.