The US federal judge recently denied crypto exchange Kraken’s request to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC). The SEC accused Kraken of operating an unregistered securities exchange, broker, dealer, and clearing agency, earning hundreds of millions of dollars illegally since 2018. The SEC argued that by not registering as a security broker, Kraken has prevented customers from receiving necessary protections.
Kraken, however, argued in its motion to dismiss the case that the SEC’s allegations were unfounded and based on a flawed interpretation of securities laws. The exchange claimed that the SEC was trying to apply outdated regulatory frameworks to the rapidly evolving crypto industry without clear guidelines. Kraken specifically defended its staking services, which the SEC claimed constituted an unregistered securities offering, as not falling under that category.
Despite Kraken’s arguments, Judge William H. Orrick ruled in favor of the SEC and rejected the exchange’s motion to dismiss. He stated that the SEC had plausibly alleged that some of the cryptocurrency transactions facilitated by Kraken constituted investment contracts and therefore fell under securities laws. This ruling aligns with SEC Chair Gary Gensler’s belief that most digital tokens are unregistered securities subject to SEC oversight.
The case, officially titled Securities and Exchange Commission v. Payward Inc., will now proceed in the US District Court for the Northern District of California. Kraken and the SEC have not yet responded to requests for comment following the judge’s decision. This setback for Kraken comes as the exchange reportedly plans to raise $100 million in a final funding round before an eventual initial public offering (IPO) in 2025.
In addition to the SEC lawsuit, Kraken also faced a legal battle with the Australian securities watchdog. The Australian Federal Court ruled against Bit Trade Pty, which operates Kraken in the country, for failing to distribute its margin trading products in compliance with Australian Securities and Investments Commission (ASIC) rules. ASIC claimed that Bit Trade had been offering “margin extension” without proper compliance since October 5, 2021, violating the Corporations Act. Both parties now have seven days to agree on declarations and injunctions, with ASIC intending to seek financial penalties against Bit Trade.
Kraken’s legal troubles with both the SEC and ASIC showcase the challenges faced by cryptocurrency exchanges operating in a rapidly evolving regulatory environment. With judges ruling in favor of regulatory bodies, exchanges like Kraken must navigate carefully to ensure compliance with securities laws to avoid further legal repercussions.
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