A United States federal court denied crypto exchange Kraken’s motion to dismiss a Securities and Exchange Commission (SEC) lawsuit alleging Kraken is operating an unregistered securities exchange, according to an Aug. 23 court filing.
In November, the SEC charged Kraken with “operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.”
“[T]he 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,” according to the opinion of the US District Court in Northern California.
Kraken’s exchange supports dozens of cryptocurrencies. Source: Kraken
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The ruling is a setback in the industry’s ongoing tussle with the SEC to define which cryptocurrencies, if any, qualify as “securities” under US law and therefore fall under the SEC’s jurisdiction.
“Once again, a court confirmed that the framework used to identify securities for nearly 80 years still applies, regardless of the labels used,” an SEC spokesperson said in a statement. “Investors in crypto assets offered or sold as securities should get the same protections as investors in other securities, even when they are traded using intermediaries.”
Crypto trading platforms should register with the SEC and “ensure they have safeguards against fraud and manipulation, the commingling of customer assets, and conflicts of interests. Until they do so, investors will continue to get hurt,” the spokesperson said.
The Aug. 23 ruling asserts an expansive definition of what constitutes a “security” by looking not only at any formal investment contracts but also at the broader context around which the instruments — in this case, virtual assets — were marketed and sold.
“[C]ontractual formalities are not required for something to qualify as an investment contract, and therefore a security,” the court said. “What counts is the totality of the circumstances surrounding a sale, trade, or exchange, and the expectations of the investor.”
In an Aug. 23 post on the X platform, Kraken’s chief legal officer Marco Santori said the court actually “ruled, as matter of law, that none of the tokens trading on Kraken are securities.”
“Fundamentally, the Court in Kraken’s case made the same distinction as in the Ripple case: A token isn’t a security, but agreements around a token could be,” according to Santori.
As a result, the SEC “will need to prove, for every alleged transaction on Kraken, that the Howey Test factors are satisfied. They aren’t, and we look forward to proving this,” Santori said.
Coinbase is embroiled in a similar battle with the SEC over whether its virtual asset staking products constitute an unlawful securities offering. In August, the SEC reportedly rejected an application from securities exchange Cboe Global Markets to list Solana (SOL) exchange-traded funds (ETFs) on grounds that SOL is a security.
According to the SEC’s complaint, “Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.”
To deny the motion to dismiss the suit, the court only had to conclude that the SEC’s claims are plausible. A final ruling has yet to be made.
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