A California judge recently ruled that the Securities and Exchange Commission’s lawsuit against crypto exchange Kraken will head to trial.
The regulator sued the exchange in November last year alleging that it breached federal securities laws by not registering as a broker, clearinghouse, or exchange.
The complaint sought a permanent injunction against Kraken to prevent further securities violations, along with the disgorgement of its “ill-gotten gains” and the imposition of other civil penalties.
Kraken’s motion to deny the SEC’s case has now been denied by the court.
Judge William Orrick emphasized that the regulator has “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 added,
"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."
The judge was partially on the same page as Kraken, and ruled that the crypto assets named by the SEC in its lawsuit were “not themselves investment contracts."
Acknowledging this part of the ruling, the Kraken's Chief Legal Officer Marco Santori said,
“Today, the Federal Court for the Northern District of California ruled, as 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.”
However, this does not mean that the purchase and sale of these tokens cannot be considered as investment contracts. The judge metaphorically said,
“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 Act.”
In another parallel development, an Australian court ruled last week that Kraken’s local operator violated a local law that mandated issuers to make a “target market determination” before putting to sea their product. The exchange blamed unclear laws for its loss in court.
