Crypto exchange Kraken claimed notable legal progress against the US Securities and Exchange Commission (SEC) despite the court’s decision not to dismiss allegations that Kraken operated an unregistered securities exchange.
On August 23, Judge William Orrick ruled that the SEC presented a plausible case suggesting that some of Kraken’s crypto transactions could qualify as investment contracts and therefore be subject to securities laws.
Kraken Pick Victories Against US SEC
In response to the ruling, Kraken’s Chief Legal Officer, Marco Santori, highlighted that the court did not classify any tokens traded on Kraken as securities. He noted that the court found the SEC’s concept of a “crypto asset security” unclear and potentially misleading.
Additionally, he stated that the court criticized the SEC for misrepresenting Kraken’s position by suggesting that a written contract is necessary for a security to exist.
Santori clarified that while the court allowed the case to proceed, it highlighted that although a token itself isn’t a security, agreements surrounding it could be. He further pointed out that the SEC’s argument that “tokens are securities” was entirely rejected. Moving forward, the SEC must prove that each transaction on Kraken meets the Howey Test criteria.
Read more: Kraken Review 2024: A Review of Its Security, Fees, and Features
Santori warned that applying this standard across the crypto industry under the SEC’s regulation-by-enforcement strategy would demand extensive and costly discovery for potentially billions of transactions. However, he remains confident that “Kraken will fight and Kraken will win” the case.
“To deliver clarity to the industry, to protect consumers and foster the growth of blockchain technology, Congress must pass a comprehensive market structure framework,” Santori suggested.
The Exchange Suffers Loss in Australia
Notably, the US court ruling arrived on the same day that an Australian Federal Court ruled against Bit Trade, Kraken’s Australian operator, for failing to meet regulatory obligations. The Australian Securities and Investments Commission (ASIC) had filed a lawsuit against Bit Trade, accusing it of not complying with the design and distribution requirements for its margin trading product.
In his ruling, Justice Nicholas sided with ASIC, noting that Bit Trade breached a section of the Corporations Act by not adhering to local laws.
“Today’s outcome sends a salient reminder to the crypto industry about the importance of compliance with the design and distribution obligations. It is a legal requirement for financial products to be distributed to consumers appropriately. Consumers should receive the full protection of the law when dealing in crypto-asset products and we will continue to take action to ensure this happens,” ASIC Deputy Chair Sarah Court said.
ASIC plans to seek financial penalties against Bit Trade, pending agreements on declarations and injunctions from both parties.
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