SEC Scores Partial Win Against Kraken in Crypto Regulation Battle

The U.S. Securities and Exchange Commission (SEC) has scored a partial victory in its ongoing legal battle with cryptocurrency exchange Kraken. On January 24, 2025, a California federal judge ruled partly in favor of the SEC, dismissing one of Kraken's key defenses in the case.

The SEC sued Kraken in November 2023, accusing the exchange of operating as an unregistered securities exchange, broker, dealer, and clearing agency. According to the SEC's complaint, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of "crypto asset securities" since September 2018.

Kraken raised eighteen defenses in response to the SEC's lawsuit. The SEC sought to dismiss several of these defenses, including the "major questions doctrine" defense. This defense argues that government agencies cannot regulate large sectors of the economy unless Congress has given them specific authority. Kraken claimed the SEC did not have clear authority over cryptocurrencies.

However, Judge William Orrick disagreed with Kraken's argument. He ruled that while cryptocurrency is growing, it does not have the same economic impact as areas like energy or student loans. The judge also said the SEC's actions were based on established securities laws, not an expansion of authority.

Judge Orrick noted, "The SEC is not asserting a 'transformative expansion in its regulatory authority' or a 'highly consequential power beyond what Congress could reasonably be understood to have granted it.'"

Despite the setback, Kraken's "fair notice" defense remains intact. The crypto exchange argues it was not clearly told that its actions violated the law. It claims it didn't know that certain digital assets on its platform could be considered "investment contracts" under the Howey test, a Supreme Court ruling that defines securities.

Judge Orrick agreed that Kraken had a plausible argument and allowed this defense to proceed. He wrote, "I have already determined that the major questions doctrine is not implicated in this case, at least under the current facts, and GRANT the motion to dismiss it. But Kraken is entitled to proceed with the other two defenses, which are plausibly alleged."

This ruling is a key moment in the ongoing regulatory scrutiny of the crypto industry and over crypto assets. The SEC's attempt to apply traditional securities laws to crypt