Kraken faces SEC suit over crypto exchange registration

Cryptocurrency platform Kraken must face a US Securities and Exchange Commission lawsuit accusing it of operating an unregistered securities exchange, a judge has ruled.

“The SEC has plausibly argued that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts and, therefore, securities and, accordingly, are subject to the securities laws,” the judge wrote U.S. District Attorney William H. Orrick in an opinion issued Friday. in federal court in San Francisco.

Kraken asked the judge to dismiss the case filed by the SEC in November. The ruling comes after Bloomberg News reported in early June that Kraken, one of the oldest crypto exchanges, is considering raising a final round of funding ahead of a possible initial public offering.

The judge said the SEC’s labeling of Kraken tokens as “crypto-asset securities” is “vague at best and confusing at worst.” Orrick went on to say that he reads the agency’s claims as focusing on assets offered as part of investment contracts and not as allegations that individual cryptocurrency tokens are themselves securities.

Kraken’s legal director hailed the decision as a finding that none of the tokens traded on Kraken are securities.

“This is a significant win for Kraken, for the principle of clarity and for crypto users everywhere,” Marco Santori said in a post on X, the social media platform. “It also confirms Kraken’s long-standing position that it does not list titles.”

An SEC spokesman said the ruling confirms that “the framework used to identify securities for nearly 80 years still applies, regardless of the labels used.”

“Investors in cryptoassets offered or sold as securities should enjoy the same protections as investors in other securities, even when traded using intermediaries,” the spokesperson said in a statement.

The SEC under Chairman Gary Gensler argues that most digital tokens are unregistered securities that should be subject to its oversight. Gensler is highly critical of crypto exchanges and the digital asset industry for alleged non-compliance.

But the question of whether digital tokens are securities has divided the courts. A federal judge in Manhattan ruled last year that sales of Ripple Labs XRP tokens were not subject to SEC jurisdiction when offered to the public on exchanges, while other judges reached the opposite conclusion in the regulator’s cases against Terraform Labs Pte. . and Coinbase Global Inc., the largest US cryptocurrency exchange.

The Ripple ruling, which found that XRP was covered by securities law only when sold to institutional investors, was hailed as a major victory for the industry. Earlier this month, Ripple scored another win when it was ordered to pay a $125 million civil penalty for sales to institutional investors — a fraction of the nearly $2 billion in penalties the SEC had sought.

Kraken has argued, like Ripple, that the SEC has no jurisdiction over digital assets.

At a June hearing on Kraken’s motion to dismiss the SEC lawsuit, the exchange’s attorney urged Orrick not to apply the Terraform and Coinbase rulings to the case.

Terraform offered tokens directly, while Kraken is an exchange or “secondary market” subject to different regulations, the lawyer told the judge. As for Coinbase, Kraken’s lawyer said he disagreed with that judge’s ruling, arguing it contradicted precedents from the US Supreme Court and the Ninth Circuit Court of Appeals, the intermediate court for West Coast states.

The case is Securities and Exchange Commission v. Payward Inc., 23-cv-06003, U.S. District Court, Northern District of California (San Francisco).

Top photo: The Kraken logo on a laptop arranged in Hastings-on-Hudson, New York, U.S., Friday, February 10, 2023. Kraken will pay $30 million to settle Securities and Exchange Commission charges that it violated the agency’s rules with its cryptoasset staking products and will discontinue them in the US as part of the settlement with the regulator. Photographer: Tiffany Hagler-Geard/Bloomberg.

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