Kraken Loses SEC Case as Court rejects Key Defense
Despite Kraken’s claim that the SEC lacks authority over crypto under the “central questions doctrine,” a federal magistrate disregarded the defense.
The judge permitted Kraken’s “fair notice” and “due process” defenses to proceed, but he dismissed its “central questions doctrine” defense.
The Securities and Exchange Commission (SEC) filed a lawsuit against Kraken, alleging that it provided unregistered securities through its exchange services. In response, Kraken implemented eighteen defenses. The SEC attempted to invalidate a number of them, including the “significant questions doctrine” defense.
This defense contends that government agencies are incapable of overseeing substantial sectors of the economy unless Congress has granted them specific authority. Kraken contended that the SEC lacked clear authority over cryptocurrencies.
Nevertheless, Judge William Orrick expressed his dissent. He determined that, despite the fact that cryptocurrency is expanding, it does not have the same economic influence as sectors such as energy or student loans. Additionally, he stated that the SEC’s actions were compliant with established securities laws, rather than an expansion of authority.
“The SEC is not asserting a “transformative expansion in its regulatory authority” or an “extremely consequential power beyond what Congress is likely to have granted it,” the court said.”
However, Kraken’s “fair notice” defense remains unaffected. The cryptocurrency exchange contends that it was not explicit that its actions were in violation of the law. It contends that it was unaware that specific digital assets on its platform could be classified as “investment contracts” under the Howey test, a Supreme Court decision that defines securities.
Judge Orrick concurred that Kraken’s argument was plausible and permitted the defense to proceed.
“I have already determined that the significant questions doctrine is not relevant in this case, at least in light of the current circumstances. Therefore, I grant the motion to dismiss it. However, Kraken is qualified to pursue the other two defenses, as they are plausible,” the judge stated.
This ruling is a critical moment in the ongoing regulatory scrutiny of the crypto industry, particularly in light of the fact that companies such as Binance and Coinbase are also contesting the SEC’s authority over crypto assets. The SEC has encountered legal obstacles in its endeavor to extend conventional securities laws to cryptocurrencies.
In November 2023, the Securities and Exchange Commission (SEC) initiated litigation against Kraken for its operation as an unregistered securities exchange, broker, dealer, and clearing agency. Kraken has fraudulently generated hundreds of millions of dollars by facilitating the purchase and sale of “crypto asset securities” since September 2018, as per the SEC’s complaint.