Kraken Must Face SEC Lawsuit Over Crypto Exchange Registration – BNN Bloomberg

(Bloomberg) — Cryptocurrency platform Kraken must face a US Securities and Exchange Commission lawsuit accusing it of operating an unregistered securities exchange, a judge ruled. 

“The SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws,” US District Judge William H. Orrick wrote in an opinion published Friday in San Francisco federal court.

Representatives for Kraken and the SEC didn’t immediately respond to requests for comment.

Kraken had asked the judge to dismiss the case filed by the SEC in November. The ruling comes after Bloomberg News reported in early June that Kraken, one of the oldest crypto exchanges, was considering raising a final funding round ahead of a possible initial public offering.

The SEC under Chair Gary Gensler argues most digital tokens are unregistered securities that should be subject to its oversight. Gensler is highly critical of crypto exchanges and the digital-asset industry for alleged noncompliance.

But the question of whether digital tokens are securities has divided courts. A Manhattan federal judge ruled last year sales of Ripple Labs XRP token weren’t subject to SEC jurisdiction when offered to the public on exchanges, while other judges reached the opposite conclusion in the regulator’s cases against Terraform Labs Pte. and Coinbase Global Inc., the largest US crypto exchange.

The Ripple ruling, which found XRP was covered by securities law only when sold to institutional investors, was hailed as a major victory for the industry. Earlier this month, Ripple notched another win when it was ordered to pay a civil penalty of $125 million for the sales to institutional investors — a fraction of the nearly $2 billion in penalties the SEC had sought.

Kraken had argued, like Ripple, that the SEC doesn’t have jurisdiction over digital assets. 

At a June court hearing on Kraken’s motion to dismiss the SEC suit, the exchange’s lawyer urged Orrick not to apply the Terraform and Coinbase rulings to the case.

Terraform offered tokens directly, whereas Kraken is an exchange or “secondary market” subject to different regulations, the lawyer told the judge. With regard to Coinbase, the Kraken attorney said he disagreed with that judge’s ruling, arguing it was inconsistent with precedents in the US Supreme Court and Ninth Circuit Court of Appeals, the intermediate court for West Coast states.

The case is Securities and Exchange Commission v. Payward Inc., 23-cv-06003, US District Court, Northern District of California (San Francisco).

–With assistance from Chris Dolmetsch and Lydia Beyoud.

(Updates with background on SEC cases targeting other exchanges)

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