Kraken's Lawsuit From SEC Greenlit By US Judge

A California judge has ruled that the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken will go to trial.

Back in November, the SEC accused the crypto exchange of violating federal securities laws by failing to register as a broker, clearinghouse, or exchange. The lawsuit seeks to permanently bar Kraken from further securities violations and demands the return of its so-called "ill-gotten gains," along with other penalties.

The charges against Kraken stem from allegations that the exchange has been offering and selling unregistered securities through its staking-as-a-service program. The SEC contends that Kraken's program, which allows customers to earn rewards by staking their crypto assets, constitutes an offer and sale of securities, thus falling under the regulatory purview of the commission.

Kraken described the allegation as "hollow," claiming "there is no such thing as an exchange, broker-dealer, or clearing agency for investment contracts" and motioned to dismiss the case in February.

However, Kraken's motion was denied on Friday as US District Court Judge William H. Orrick of the Northern District of California said the regulator “plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws.”

Orrick partially sided with Kraken, ruling that the specific cryptocurrencies mentioned by the SEC are "not themselves investment contracts"—a point the SEC’s attorneys have distanced themselves from in other cases.

"Numerous courts have distinguished between the digital assets and the offers to sell them before engaging in an analysis of whether cryptocurrency transactions constitute investment contracts. The distinction is valuable," Orrick wrote.

He added, "Although the way the SEC labels the crypto assets at issue—as ‘crypto asset securities’—is unclear at best and confusing at worst, I do not understand the SEC to be alleging that the individual cryptocurrency tokens in which Kraken enables transactions are themselves securities."

Orrick further clarified that "the meat of the SEC’s pleadings alleges that during their initial offerings and throughout subsequent transactions on Kraken, those assets were offered as, or sold as, investment contracts. This is an acceptable framing, and one that the SEC has repeatedly advanced in other cases."

Kraken’s chief legal officer, Marco Santori, highlighted this part of Orrick’s ruling on X, stating, "Today, the Federal Court for the Northern District of California ruled, as a matter of law, that none of the tokens trading on Kraken are securities. This is a significant win for Kraken, for the principle of clarity and for crypto users everywhere. It also confirms Kraken’s long-standing position that it does not list securities."

Nonetheless, Orrick declared, "Orange groves are no more securities than cryptocurrency tokens are. But the contracts surrounding the sale of both may form an investment contract, bringing them within the purview of the [Exchange] Act."

Other courts have already considered whether similar claims brought by the SEC violate the major questions doctrine and found that they do not," Orrick wrote. "The same is true here…while cryptocurrency itself is a relatively novel financial instrument, the principles driving the SEC’s attempt to assert regulatory authority over it are not new."

Both Kraken and the SEC are now required to submit a joint statement by October 8, outlining a proposed schedule for the case and a trial date.