The legal battle between the US Securities and Exchange Commission (SEC) and crypto exchange Kraken took a major turn on January 24, 2025.
In a setback for Kraken, a California federal judge has ruled partly in favor of the SEC.
Kraken’s ‘Major Questions’ Defense Rejected in SEC Lawsuit
The judge allowed Kraken’s “fair notice” and “due process” defenses to proceed but dismissed its “major questions doctrine” defense.
The SEC sued Kraken, accusing it of offering unregistered securities through its exchange services. Kraken raised eighteen defenses in response. The SEC sought to dismiss several of them, including the “major questions doctrine” defense.
This defense argues that government agencies can’t regulate large sectors of the economy unless Congress has given them specific authority. Kraken claimed the SEC did not have clear authority over cryptocurrencies.
However, Judge William Orrick disagreed. He ruled that while cryptocurrency is growing, it doesn’t have the same economic impact as areas like energy or student loans. He also said the SEC’s actions were based on established securities laws, not an expansion of authority.
“The SEC is not asserting a “transformative expansion in its regulatory authority” or a “highly consequential power beyond what Congress could reasonably be understood to have granted it,” the court noted.
Nevertheless, Kraken’s “fair notice” defense remains intact. The crypto exchange argues it was not clearly told that its actions violated the law. It claims it didn’t know that certain digital assets on its platform could be considered “investment contracts” under the Howey test, a Supreme Court ruling that defines securities.
Judge Orrick agreed that Kraken had a plausible argument and allowed this defense to proceed.
“I have already determined that the major questions doctrine is not implicated in this case, at least under the current facts, and GRANT the motion to dismiss it. But Kraken is entitled to proceed with the other two defenses, which are plausibly alleged,” the judge wrote.
This ruling is a key moment in the ongoing regulatory scrutiny of the crypto industry, especially as companies like Coinbase and Binance are also fighting the SEC’s authority over crypto assets. The SEC’s attempt to apply traditional securities laws to cryptocurrencies has faced legal challenges.
The SEC first sued Kraken in November 2023 for operating as an unregistered securities exchange, broker, dealer, and clearing agency. According to the SEC’s complaint, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of “crypto asset securities,” since September 2018.
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