- A California federal judge ruled in favor of the SEC, dismissing Kraken’s “major questions doctrine” defense.
- Kraken retained its “fair notice” defense, with the court noting that the SEC must prove Kraken had sufficient understanding of how securities laws, like the Howey Test, apply to its platform’s transactions.
The Securities and Exchange Commission (SEC) has secured a partial victory against cryptocurrency exchange Kraken after a federal court in California ruled in favour of the SEC —dismissing Kraken’s claim that Congress didn’t grant the agency authority to regulate cryptocurrencies.
Crypto Is Just Not That Important
Judge William H. Orrick dismissed Kraken’s reliance on the “major questions doctrine” —a legal principle arguing that federal agencies cannot exercise powers not explicitly granted by Congress, a doctrine that Kraken and crypto companies like Coinbase, Ripple, and Binance, have invoked to challenge the SEC’s authority over the crypto industry.
But Judge Orrick is not buying it. He ruled that the SEC’s actions, in this case, did not constitute an overreach of its regulatory powers, noting that the doctrine typically applies to issues with “significant economic implications”, such as the energy market or student loan debt.
But not crypto, as Judge Orrick concluded that cryptocurrency, while growing, has not yet reached a comparable level of economic importance.
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While this has officially strengthened the regulator’s position in its case against the exchange, Kraken preserved its “fair notice” defense, which argues that the SEC failed to provide adequate warning that its activities violated securities laws.
Moreover, Judge Orrick found that Kraken had plausibly alleged a lack of fair notice, which could also raise due process concerns, stating that the SEC would need to demonstrate that an ordinary entity in Kraken’s position would understand how the Howey Test —a legal standard for determining securities— applies to secondary market transactions on its platform.
The judge stated that the SEC had not yet made such a showing.
More to Come
The SEC sued Kraken in November 2023, alleging that the exchange operated as an unregistered securities exchange and violated securities laws since 2018, similar to what it said about practically every crypto-related company it has gone after.
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The regulator also named Payward Inc. and Payward Ventures, the entities operating as Kraken, in the lawsuit.
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