In a recent development, a US federal judge has denied crypto exchange Kraken’s request to dismiss the lawsuit filed by the Securities and Exchange Commission (SEC) over allegations of operating an unregistered securities exchange. This decision comes after Kraken requested a dismissal of the case filed by the SEC in November.
The regulator’s complaint accused the exchange of operating an unregistered securities exchange, broker, dealer, and clearing agency. The SEC further accused the crypto exchange of illegally facilitating the trading of securities, earning hundreds of millions of dollars in the process since 2018.
Kraken, in its motion to dismiss the case, argued that the SEC’s allegations against the company are unfounded and based on a flawed interpretation of securities laws. The exchange contended that the SEC is attempting to apply outdated regulatory frameworks to the rapidly evolving crypto industry without clear guidelines.
Despite Kraken’s defense, Judge William H. Orrick ruled in favor of the SEC and rejected the exchange’s motion to dismiss. He stated, “The SEC 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.”
This ruling aligns with SEC Chair Gary Gensler’s stance that most digital tokens are unregistered securities subject to SEC oversight. The case, officially titled Securities and Exchange Commission v. Payward Inc., will proceed in the US District Court for the Northern District of California.
Notably, this setback in court comes as Kraken reportedly plans to raise $100 million in a final funding round before an eventual initial public offering (IPO) in 2025. However, the legal challenges faced by the exchange could potentially impact its future growth and plans.
In addition to the SEC lawsuit, Kraken also lost a case filed by the Australian securities watchdog. According to the Australian Federal Court decision, Bit Trade Pty – which operates the Kraken exchange in the country – failed to adequately distribute its margin trading products within Australian Securities and Investments Commission (ASIC) rules. ASIC claimed that Bit Trade has been offering “margin extension” with no compliance since Oct. 5, 2021, contravening the s994B(2) of the Corporations Act each time it made the product available to a customer.
Both the SEC lawsuit and the Australian legal case highlight the regulatory challenges faced by cryptocurrency exchanges like Kraken. Compliance with securities laws is crucial in ensuring the protection of investors and maintaining the integrity of the financial system. As the crypto industry continues to evolve, exchanges must navigate complex regulatory landscapes to operate within the boundaries of the law. Kraken’s legal battles serve as a reminder of the importance of regulatory compliance and the consequences of failing to adhere to established guidelines.
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