A federal judge in California has put doubt on Kraken’s efforts to dismiss the lawsuit filed by the US Securities and Exchange Commission (SEC). Reports suggest that Judge William Orrick indicated that he is likely to deny Kraken’s request as the exchange presented its case for dismissal. The judge mentioned that it was “plausible” that the digital assets offered on Kraken’s platform might be sold as investment contracts.
During the hearing, Judge Orrick seemed to agree with the SEC’s arguments and expressed his inclination to let the case proceed. Lawyers present at the hearing anticipated that the case could enter the discovery phase based on the proceedings held on June 20th. However, by the end of the hearing, Judge Orrick had not made a final decision on whether to grant a dismissal. He mentioned that he would review both parties’ arguments before reaching a conclusion.
Kraken’s Defense
Kraken’s lawyer, Matthew Solomon, addressed the SEC’s claims by stating that the platform’s web pages provide information about each asset, but they do not promote or promise anything. He argued that the SEC needed to prove that Kraken broker-traded or cleared the alleged security, which cannot be demonstrated through the current argument. Solomon emphasized that one cannot trade an “ecosystem,” “concept,” or “understanding.”
Solomon drew parallels between Kraken’s case and the SEC’s lawsuit against Coinbase, where a similar “ecosystem” concept was introduced. In the Coinbase ruling, it was established that certain transactions on the platform could be considered investment contracts. Solomon urged Judge Orrick to deviate from the reasoning in the Coinbase case, criticizing the interpretation of a “crypto ecosystem.”
SEC attorney Peter Moores countered Kraken’s arguments by emphasizing the substance over the form of transactions. He maintained that the framework employed in the Coinbase decision was suitable for the Kraken case as well. Moores highlighted the significance of the Howey Test and stated that it did not require a written contract to determine securities.
Kraken invoked the major questions doctrine, which necessitates clear congressional authorization for regulatory actions with significant national impact. However, Judge Orrick seemed unconvinced by this argument, suggesting that it did not qualify as a major question. Solomon referenced the SEC’s case against Ripple to assess the handling of secondary market sales of crypto and endorsed Judge Analisa Torres’ decision in the Ripple case.
Solomon applied the “economic reality” principle to Kraken’s situation, arguing that the platform is not trading investment contracts, rights, or obligations but solely digital assets. He emphasized that this did not warrant registration with the SEC.
The proceedings between Kraken and the SEC indicate a complex legal battle over the classification of digital assets and the regulatory framework surrounding them. While Kraken continues to defend its position, Judge Orrick’s inclination to let the case proceed suggests that the final decision will have significant implications for the crypto industry as a whole.
