SEC Scores Partial Win Against Kraken in Crypto Regulation Showdown

The U.S. Securities and Exchange Commission (SEC) has secured a partial victory in its lawsuit against cryptocurrency exchange Kraken. The ruling, made by U.S. District Judge William H. Orrick, allows the SEC to proceed with its claims that Kraken offered unregistered securities and operated illegally as an exchange, broker, dealer, and clearing agency.

Kraken had argued that the SEC was overstepping its authority by applying the "major questions doctrine," which asserts that government agencies cannot exercise powers not explicitly delegated to them by Congress. However, Judge Orrick noted that the SEC was not claiming "extremely consequential powers beyond what Congress could reasonably be understood to have granted it."

Orrick acknowledged Kraken's argument regarding the lack of "fair notice" from the SEC about alleged legal violations. He stated that the SEC must demonstrate that an ordinary entity in Kraken's position would understand that transactions on its platform qualify as investment contracts under the Howey test.

The SEC initially accused Kraken in November 2023 of offering unregistered securities and mixing customer funds with its own assets. In February 2024, Kraken filed a motion to dismiss the SEC's lawsuit, arguing that its outcome could set a dangerous precedent for regulatory authority. However, a U.S. federal court denied Kraken's motion to dismiss the SEC's claims in August.

The ruling has significant implications for the cryptocurrency industry, as it sets a precedent for the SEC's regulatory authority over cryptocurrency exchanges. The case highlights the ongoing tension between the SEC and cryptocurrency companies over the classification of digital assets and the application of securities laws.