A federal judge in California hinted that he is likely to let the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken proceed, despite the exchange’s efforts to have the case dismissed. Judge William Orrick stated that he was inclined to deny Kraken’s request as it presented its oral argument for dismissal. The judge added that the digital assets offered on the platform may be considered investment contracts.
According to FOX Business reporter Eleanor Terrett, the judge seemed to agree with the SEC’s arguments and lawyers believe the case will go into discovery based on the June 20 proceedings. However, Judge Orrick had not made a final decision by the end of the hearing and intended to review both parties’ arguments.
Kraken’s lawyer, Matthew Solomon, contested the SEC’s “ecosystem” argument, stating that the platform is not promoting or promising anything but merely providing summaries of what issuers are saying. He argued that the SEC must prove that Kraken broker-traded or cleared the supposed security, which cannot be proven through the current argument.
Soloman compared the case to the SEC’s case against Coinbase and criticized the concept of a “crypto ecosystem.” The SEC attorney, Peter Moores, emphasized the importance of substance over form in transactions and maintained that the framework used in the Coinbase decision was appropriate for the Kraken case.
Kraken also invoked the major questions doctrine, requiring clear congressional authorization for regulatory actions of significant national impact. However, Judge Orrick appeared unconvinced by this argument, stating that it was not a significant expansion of regulatory authority. Soloman urged the judge to consider the SEC’s case against Ripple to determine how to handle secondary market sales of crypto.
Applying the “economic reality” principle to Kraken, Soloman argued that the exchange is trading a digital asset alone and not an investment contract, understandings, rights, or obligations. Kraken insisted that this is not sufficient to require registration with the SEC.
In conclusion, the judge’s signal indicates a likely continuation of the SEC lawsuit against Kraken, as the arguments presented by both parties are being carefully considered. The outcome of the case will have significant implications for the regulation of digital assets and crypto trading platforms in the future.