Recently, a federal judge in California expressed his inclination to allow the US Securities and Exchange Commission’s lawsuit against Kraken to proceed. This decision has raised uncertainties about Kraken’s efforts to have the case dismissed. Judge William Orrick hinted that he was leaning towards denying Kraken’s request as he listened to the exchange’s oral arguments. He deemed it “plausible” that the digital assets offered on the platform might be considered investment contracts.
The SEC has put forward the argument that Kraken’s asset-specific web pages contain information that promotes each asset, possibly influencing their prices. However, Kraken’s lawyer, Matthew Solomon, has contested this claim. Solomon emphasized that merely providing summaries of what asset issuers are saying does not equate to promoting or promising anything. He argued that the SEC must prove that Kraken broker-traded or cleared the securities in question, which cannot be demonstrated through the current argument.
Solomon drew parallels between the ongoing lawsuit against Kraken and a previous SEC case involving Coinbase. In the Coinbase ruling, Judge Katherine Polk Failla determined that certain crypto transactions on the platform could be viewed as investment contracts. Solomon criticized the idea of a “crypto ecosystem” used in the Coinbase case, stating that it unjustly stretches regulatory boundaries. Meanwhile, SEC attorney Peter Moores defended the use of the same framework in the Kraken case, emphasizing the substance of transactions over their form.
Kraken invoked the major questions doctrine, which requires clear congressional authorization for regulatory actions with significant national impacts. However, Judge Orrick seemed unconvinced by this argument, mentioning that he did not view the case as a significant expansion of regulatory authority. Solomon urged the judge to consider the SEC’s case against Ripple, where programmatic XRP sales were not deemed securities, for guidance on handling secondary market sales of crypto assets.
Solomon applied the principle of “economic reality” to Kraken’s case, asserting that the exchange is trading digital assets rather than investment contracts. He referenced a decision by Judge Analisa Torres in the Ripple case, which focused on examining the economic reality of transactions. Solomon praised the opinion as practical and well-reasoned, calling for a similar approach to be taken in the Kraken lawsuit. Kraken maintained that its activities do not require registration with the SEC.
The outcome of the SEC lawsuit against Kraken remains uncertain as Judge Orrick deliberates over the arguments presented by both parties. The case highlights the complexities surrounding the regulation of digital assets and the need for a comprehensive understanding of the economic realities underlying crypto transactions.
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