In a recent development, a US federal judge has rejected the request made by Kraken, a popular cryptocurrency exchange, to dismiss a lawsuit filed by the Securities and Exchange Commission (SEC). The lawsuit, which was filed in November, accuses Kraken of operating an unregistered securities exchange, broker, dealer, and clearing agency. The SEC alleges that Kraken has been facilitating the trading of securities illegally and has earned significant profits since 2018 without adhering to regulatory requirements.
Kraken, in its defense, argued that the SEC’s allegations are baseless and that the regulator is applying outdated regulatory frameworks to the crypto industry without clear guidelines. The exchange particularly emphasized that its staking services, which are at the core of the SEC’s case, do not constitute an unregistered securities offering as claimed by the regulator. However, Judge William H. Orrick ruled in favor of the SEC, stating that the SEC has plausibly alleged that some of the cryptocurrency transactions facilitated by Kraken constitute investment contracts and are therefore subject to securities laws.
The ruling is in line with SEC Chair Gary Gensler’s stance that most digital tokens are unregistered securities and should be subject to SEC oversight. The case, officially known as Securities and Exchange Commission v. Payward Inc., will proceed in the US District Court for the Northern District of California. Both Kraken and the SEC have not yet commented on the ruling.
This legal setback for Kraken comes at a time when the exchange is reportedly planning to raise $100 million in a final funding round before pursuing an initial public offering (IPO) in 2025. In another legal challenge, the Australian securities watchdog recently ruled against Bit Trade Pty, which operates the Kraken exchange in Australia. ASIC found that Bit Trade had been offering margin trading products without complying with ASIC rules since October 5, 2021. ASIC intends to seek financial penalties against Bit Trade as a result of the violation.
The denial of Kraken’s request to dismiss the SEC lawsuit is a significant blow to the exchange, as it highlights the challenges faced by cryptocurrency firms in navigating the regulatory landscape. The outcome of this case could have far-reaching implications for the broader crypto industry, as regulators worldwide continue to scrutinize digital asset exchanges for compliance with securities laws. Kraken’s legal battles underscore the importance of regulatory clarity and compliance in the cryptocurrency sector, as companies seek to operate within the bounds of the law while providing innovative financial services to their customers.