SEC Challenges Kraken’s Defenses in Crypto Regulation Lawsuit

The US Securities and Exchange Commission (SEC) has sought to strike out three defenses that the cryptocurrency exchange Kraken advanced. On November 5, the SEC filed its motion with the Northern District Court of California seeking to dismiss Kraken’s pleadings. The SEC contends these defenses are legally insufficient and could delay the case. This legal fight is based on accusations that Kraken has acted against federal securities laws.

Kraken’s Core Defenses

Kraken’s defense has three principal arguments. First, it posits that current securities laws are ambiguous regarding the digital asset class. Kraken also stated that adequate notice of potential market violations has not been provided. Kraken is also employing the ‘major questions doctrine’. This doctrine, which the Supreme Court has set, prevents agency actions on important questions without congressional authorization. 

Kraken believes the same principle should shield it from the SEC’s complaint, given that the legislation does not define digital assets well. The SEC disagrees and contends that “investment contracts” laws are well-established under the Securities Exchange Act of 1934 and apply directly to Kraken’s activities.

SEC’s Clear Stance

The case began in November 2023 when the SEC sued Kraken. The agency claims Kraken has acted as an unregistered securities exchange, broker, dealer, and clearing agency. The SEC alleges that, since 2018, Kraken has made hundreds of millions of dollars by allowing trades of crypto asset securities. It argues that Kraken’s unregistered operations bypassed vital investor protections. Kraken sought to dismiss the case, but the court rejected that motion in August. The lawsuit is now moving forward.

Kraken has since made broad discovery requests, asking for many documents from the SEC. The SEC claims these requests are burdensome based on defenses it sees as legally unsound. The agency argues that dismissing these defenses would narrow the case’s scope. It would save time, conserve judicial resources, and prevent repetitive arguments from Kraken.

This case has many implications for the whole crypto industry. If the court supports Kraken, then Congress will have to improve the regulation concerning digital assets. This decision may become a precedent for further evolution of crypto regulation in the United States while the case remains ongoing.