In a recent development, a federal judge in California has indicated that he is inclined to let the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken proceed. This decision casts doubt on the exchange’s efforts to have the case dismissed. According to reports, Judge William Orrick stated that he was “inclined to deny” Kraken’s request and deemed it “plausible” that the digital assets offered on the platform could be considered investment contracts.
The SEC’s argument revolves around the idea that Kraken’s asset-specific web pages contain information that promotes each asset, including efforts by issuers and promoters to grow blockchain ecosystems in the hope of increasing asset prices. Kraken’s lawyer, Matthew Solomon, refuted this claim by stating that the platform is not endorsing or promising anything, and therefore, should not be held accountable for the securities regulations.
Solomon drew parallels between Kraken’s current case and the SEC’s lawsuit against Coinbase, where a similar ecosystem concept was used. In the Coinbase ruling, Judge Katherine Polk Failla had concluded that some crypto transactions on the platform could be considered investment contracts. However, Solomon criticized this interpretation and urged Judge Orrick to depart from Judge Failla’s reasoning, arguing that it unfairly stretches regulatory boundaries.
SEC attorney Peter Moores emphasized the importance of the substance over the form of transactions, stating that the Howey Test does not require a written contract. He maintained that the framework used in the Coinbase decision was appropriate for the Kraken case as well. This implies that the SEC’s argument is based on the economic reality of the transactions rather than the legal formalities.
Kraken invoked the major questions doctrine, which requires clear congressional authorization for regulatory actions of significant national impact. However, Judge Orrick appeared unconvinced by this argument, stating that the case does not involve a significant expansion of regulatory authority. Solomon, representing Kraken, urged the judge to consider the SEC’s case against Ripple, where programmatic XRP sales were not considered securities, to determine how to handle secondary market sales of crypto.
The SEC lawsuit against Kraken presents a complex legal battle regarding the classification of digital assets and their regulatory requirements. While Kraken argues that it is not trading investment contracts but rather digital assets, the SEC maintains that the platform’s actions fall under the purview of securities regulations. The outcome of this case could have far-reaching implications for the cryptocurrency industry as a whole.
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