A federal judge in California has indicated that he is likely to allow the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken to proceed. This decision casts doubt on Kraken’s attempts to have the case dismissed. The judge explained that it is plausible that the digital assets offered on the platform could be considered investment contracts.
The SEC argues that Kraken’s asset-specific web pages contain information that promotes the growth of blockchain ecosystems, with the hope of increasing asset value. Kraken’s lawyer, Matthew Solomon, countered this by stating that Kraken is not promoting or promising anything. He also insisted that the SEC must prove that Kraken broker-traded or cleared the supposed security, which is not possible due to the intangible nature of assets like an “ecosystem.”
Soloman compared Kraken’s case to a similar case against Coinbase, where the SEC argued that certain transactions could be considered investment contracts. In the Coinbase ruling, the concept of a “crypto ecosystem” was introduced, which Kraken’s legal team finds problematic as it stretches regulatory boundaries. The SEC maintains that the framework used in the Coinbase decision is appropriate for the Kraken case as well.
Kraken invoked the major questions doctrine, arguing that there must be clear congressional authorization for regulatory actions of significant national impact. However, Judge Orrick seemed unconvinced by this argument, stating that the case does not represent a significant expansion of regulatory authority. Kraken urged the judge to consider the SEC’s case against Ripple, which found that certain XRP sales were not securities, to guide the handling of secondary market crypto sales.
Kraken’s legal team applied the “economic reality” principle to their case, arguing that Kraken is not trading investment contracts but simply digital assets. They stressed the importance of looking at the economic reality of transactions rather than focusing on technicalities. This approach was endorsed by Judge Analisa Torres in the Ripple case, where the economic reality of transactions was used to determine the regulatory classification.
Kraken’s legal battle with the SEC highlights the complex nature of regulating digital assets in the evolving crypto landscape. The judge’s inclination to let the case proceed indicates the need for a thorough examination of the economic reality of transactions and the underlying principles of securities law. As the case unfolds, it will be interesting to see how the court navigates the nuances of crypto trading and investment contracts in the context of regulatory oversight.