Setback for Kraken as Judge Quashes Appeal in SEC Lawsuit

In a momentous setback for Kraken exchange, a federal judge in California has denied the platform’s request to appeal a previous decision that allowed the U.S. Securities and Exchange Commission (SEC) lawsuit to proceed.

In dismissing Kraken’s request for an interlocutory appeal, Judge William Orrick stated on Nov. 18 that allowing Kraken’s request “would only delay litigation without advancing a resolution.” In an earlier ruling, a judge ruled that the SEC had “adequately alleged” that digital assets traded and sold on cryptocurrency Kraken were investment contracts under the Howey test and were subject to securities laws.

Kraken Hoped the Appellate Court Would Address Significant Questions

Kraken’s bid to dismiss the SEC lawsuit follows a filing by the regulator in November 2023 accusing the exchange of operating as a broker, exchange or clearing agency. In its argument, the SEC stated that trading crypto assets like ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL constituted investment contracts subject to securities laws. Kraken denied the allegations and previously sought to dismiss the case, which Judge Orrick rejected last August.

The denial of an appeal is a setback for Kraken as the exchange previously stated there were “substantial grounds for difference of opinion” for them to argue whether the Howey Test was applicable in situations without ongoing obligations or formal contracts. The crypto exchange wanted the court of appeal to address the questions they believed adequately would absolve the platform of wrongdoing.

Judge Argues Other Courts disagreed with Kraken’s Position.

Nonetheless, the judge disagreed with the school of thought, saying no precedent supported the exchange’s interpretation of investment contracts. Judge Orrick said in his statement that further discovery was needed to determine whether Kraken’s operations met every element of the Howey Test.  Orrick opined that “several courts have addressed these issues and disagreed with Kraken’s position.” In dismissing several of the exchanges’ defences, the SEC avers Kraken’s position would create unnecessary and burdensome discovery efforts.

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The current legal setback for Kraken stems from a California judge’s ruling last August that allowed the SEC vs. Kraken to proceed to trial. In November 2023, the regulator accused Kraken of failing to register a clearing house and broker. According to the court filings, the regulator sought to bar the exchange from further violating securities laws and desired Kraken to return the “ill-gotten gains” and several other penalties.

Kraken’s bid to dismiss the SEC Lawsuit failed Last August

In its allegations, the SEC stated that the exchange sold unregistered securities through its staking-as-a-service program. According to the regulator, the program that allowed customers to stake their digital assets to earn rewards constituted an offer and sale of securities and should have fallen under the regulatory purview of the SEC. Nonetheless, the exchange holds that the allegations are hollow, adding that “there is no such thing as an exchange, broker-dealer, or clearing agency for investment contracts.”

However, Kraken’s bid to dismiss the SEC lawsuit failed last August when Judge Orrick stated the regulator “plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constituted investment contracts.” In a partial win for Kraken, the judge agreed with Kraken that some digital assets mentioned by the SEC were “not themselves investment contracts.”

Conclusion

The decision to allow the lawsuit filed in 2023 by the SEC to proceed and determine whether the second-largest cryptocurrency exchange is a setback for Kraken and the entire crypto space since the outcome could have far-reaching ramifications. While the exchange is yet to pronounce itself on the latest decision by the judge, the case’s progress remains a crucial legal battle in the regulator’s position regarding enforcement against crypto companies.  The apparent failure of Kraken’s bid to dismiss the SEC lawsuit came when the exchange announced plans to launch its blockchain to cater to retail and institutional users in 2025, when experts believe crypto’s golden era begins.