Kraken, one of the world’s oldest cryptocurrency platforms, is facing a lawsuit from the U.S. Securities and Exchange Commission (SEC) for allegedly operating an unregistered securities exchange, Bloomberg reported.
A federal judge in San Francisco, U.S. District Judge William H. Orrick, ruled in favour of allowing the case to proceed, stating that the SEC has plausibly claimed that some cryptocurrency transactions facilitated by Kraken constitute investment contracts, thus making them subject to U.S. securities laws. The ruling was issued on Friday.
SEC Alleges Kraken Voilated Security Laws
The SEC’s lawsuit, originally filed in November, alleges that Kraken violated securities laws by failing to register its exchange. Kraken, however, had requested the judge to dismiss the case. The lawsuit’s progression follows reports that Kraken is planning a final funding round before a possible initial public offering (IPO).
Judge Orrick’s ruling acknowledged the SEC’s stance but also questioned the clarity of its claims. He indicated that the SEC’s designation of Kraken’s tokens as “crypto asset securities” was confusing and that the SEC’s allegations seemed to be focused on the assets involved in investment contracts, rather than individual tokens being classified as securities.
Kraken Responds to the Lawsuit
Marco Santori, Chief Legal Officer of Kraken, responded favourably to the decision, highlighting that it did not designate any of the tokens exchanged on Kraken as securities. Santori wrote on the social networking platform X, “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.”
The SEC remains unwavering in its stance despite this. A representative for the SEC emphasised that the decision upholds the roughly 80-year-old securities identification system. According to the commission, investors in cryptocurrency assets ought to be afforded the same level of security as those who invest in conventional securities.
Ongoing Debate Over Digital Tokens as Securities
The question of whether or not digital tokens qualify as securities is at the centre of the current conflict between the SEC and the cryptocurrency sector. The SEC has insisted that the majority of digital tokens ought to be governed by securities regulations under Chair Gary Gensler. This has led to conflict with several cryptocurrency exchanges, such as Kraken, who contend they shouldn’t be subject to SEC regulation.
However, the court’s opinions on the matter are still differing. A federal judge in Manhattan decided last year that the SEC did not have jurisdiction over the sale of Ripple Labs’ XRP coins when they were made available to the general public on exchanges. Whereas, Judges have sided with the SEC in other cases, including those involving Coinbase and Terraform Labs.
Kraken’s legal arguments bear similarities to those used in the Ripple case. At a June court hearing, Kraken’s attorney argued that the SEC does not have the authority to regulate digital assets. The attorney also emphasized that Kraken operates as a secondary market and not as a direct token issuer, like Terraform Labs, therefore warranting different treatment under the law.
Kraken Faces Another Legal Battle in Australia
Regulators have also been looking at Kraken’s operations in Australia, which are operated by Bit Trade, in a different legal dispute. The Australian Securities and Investments Commission (ASIC) won a recent federal court case against Bit Trade.
It claimed that the business did not comply with design and distribution requirements and that it functioned as a credit facility without the required permits. This decision highlights the worldwide regulatory obstacles that cryptocurrency exchanges must overcome.
The more general issue of whether digital tokens are categorised as securities is still open as Kraken contends with its legal disputes in both the United States and Australia. Companies like Kraken are contesting the scope of the SEC’s regulatory authority even as it persists in calling for more stringent regulation of the crypto sector.