Recently, a US federal judge made a decision that denied crypto exchange Kraken’s request to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC). The lawsuit filed by the SEC alleged that Kraken was operating an unregistered securities exchange, broker, dealer, and clearing agency. The regulator claimed that Kraken had been illegally facilitating the trading of securities and earning millions of dollars in the process since 2018. The SEC argued that Kraken’s actions prevented customers from receiving proper regulatory protections such as inspections, safeguards against conflicts of interest, and compliance with recordkeeping requirements as they had allegedly failed to register as a security broker.
In response to the SEC’s allegations, Kraken argued that the claims made by the regulator were unfounded and based on a flawed interpretation of securities laws. The exchange contended that the SEC was trying to apply outdated regulatory frameworks to the rapidly evolving crypto industry without clear guidelines. Kraken specifically addressed the SEC’s concerns around its staking services, stating that they did not constitute an unregistered securities offering as alleged by the regulator.
Despite Kraken’s arguments, Judge William H. Orrick ruled in favor of the SEC and rejected the exchange’s motion to dismiss the case. He stated that the SEC had plausibly alleged that some of the cryptocurrency transactions facilitated by Kraken constituted investment contracts and therefore fell under the category of securities subject to securities laws. This ruling is in line with SEC Chair Gary Gensler’s position that most digital tokens are unregistered securities and should be 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. As of press time, neither Kraken nor the SEC had responded to requests for comment regarding the ruling.
In addition to the ongoing legal battle with the SEC, Kraken also faced a setback in Australia where the Australian securities watchdog filed a case against Bit Trade Pty, the operator of the Kraken exchange in the country. The Australian Federal Court ruled that Bit Trade had failed to adequately distribute its margin trading products within the rules set by the Australian Securities and Investments Commission (ASIC).
ASIC claimed that Bit Trade had been offering “margin extension” without compliance since October 5, 2021, violating s994B(2) of the Corporations Act each time the product was made available to a customer. Both parties have seven days to agree on declarations and injunctions, with ASIC indicating its intention to seek financial penalties against Bit Trade.
Kraken’s legal troubles are mounting as it faces legal challenges both in the US and Australia. The recent ruling denying the dismissal of the SEC lawsuit and the Australian Federal Court’s decision highlight the regulatory scrutiny that crypto exchanges like Kraken are under. As the crypto industry continues to evolve, exchanges will need to navigate complex regulatory landscapes to ensure compliance and avoid legal pitfalls. Kraken’s legal battles serve as a reminder of the importance of regulatory adherence in the crypto space.
