Cryptocurrency exchange Kraken must face a Securities and Exchange Commission lawsuit alleging that it operated an unregistered securities exchange, a judge ruled Friday.
“[T]he SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws,” wrote U.S. District Judge William Orrick of the Northern District of California Friday.
The regulator sued the exchange in November on the allegation that, as determined by the Howey test, crypto is an investment contract because it meets four criteria: it involves the investment of money in a common enterprise with an expectation of profits resultant of the efforts of others.
The Howey Test is an assessment arising from the Supreme Court that looked at investment contracts subject to securities law.
Kraken had filed to dismiss the SEC’s case in February.
“Once again, a court confirmed that the framework used to identify securities for nearly 80 years still applies, regardless of the labels used,” an SEC spokesperson said.
“Investors in crypto assets offered or sold as securities should get the same protections as investors in other securities, even when they are traded using intermediaries,” the spokesperson said. “Platforms for trading such crypto assets should register and ensure they have safeguards against fraud and manipulation, the commingling of customer assets, and conflicts of interests. Until they do so, investors will continue to get hurt.”
Kraken Chief Legal Officer Marco Santori, however, framed the ruling as a “significant win for Kraken, for the principle of clarity and for crypto users everywhere.”
“Today, the Federal Court for the Northern District of California ruled, as matter of law, that none of the tokens trading on Kraken are securities,” Santori wrote on social media site X, formerly Twitter. “[The ruling] also confirms Kraken’s long-standing position that it does not list securities.”
Orrick wrote that the way the SEC labels tokens on Kraken as “crypto asset securities” is “unclear at best and confusing at worst.”
But he wrote that he understood the SEC’s pleadings to allege not that Kraken’s tokens are securities, but that “during their initial offerings and throughout subsequent transactions on Kraken, those assets were offered as, or sold as, investment contracts,” which is “an acceptable framing.”
By making the distinction that tokens aren’t securities, but agreements around said tokens can be, Orrick made a similar call that Judge Analisa Torres made in Manhattan federal court regarding Ripple and its XRP tokens.
“The SEC unqualifiedly lost on this ‘tokens are securities’ theory, and will not be permitted to rely on it going forward. Instead, it will need to prove, for every alleged transaction on Kraken, that the Howey Test factors are satisfied,” Santori wrote on X after Friday’s ruling. “They aren’t, and we look forward to proving this in discovery. Kraken will fight and Kraken will win.
