Judge signals likely continuation of SEC lawsuit against Kraken Judge signals likely continuation of SEC lawsuit against Kraken

Judge signals likely continuation of SEC lawsuit against Kraken

The judge presiding over the case has not made a final decision on the matter but hinted that he is likely to side with the SEC.

Judge signals likely continuation of SEC lawsuit against Kraken

Cover art/illustration via CryptoSlate. Image includes combined content which may include AI-generated content.

A federal judge in California indicated that he is inclined to let the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken proceed, casting doubt on the exchange’s efforts to have the case dismissed, according to media reports.

According to The Block, Judge William Orrick said he was “inclined to deny” Kraken’s request as it presented its oral argument for dismissal. The judge added that it was “plausible” that the digital assets offered on the platform “are offered and sold as investment contracts.”

Meanwhile, FOX Business reporter Eleanor Terrett reported that the judge agreed with the SEC’s arguments at the beginning of the hearing and after reading each party’s briefing. She added that the lawyers she spoke to seemed to think the case would go into discovery based on the June 20 proceedings.

However, Judge Orrick had not decided whether to grant a dismissal by the end of the hearing and said he intended to review both parties’ arguments at the end of the hearing.

Kraken contests “ecosystem” argument

The SEC’s “ecosystem” argument claims that Kraken’s asset-specific web pages include information that promotes each asset, including detailing efforts by issuers and promoters to grow blockchain ecosystems in the hope of increasing asset prices.

Kraken’s lawyer, Matthew Solomon, addressed the point, stating:

“Don’t be distracted by the fact that Kraken has summaries of what the issuers are saying on their website. They’re not promoting anything.
They’re not promising anything.”

Solomon added that the SEC cannot merely show that an asset is a security but must also show that Kraken broker-traded or cleared the supposed security.

He said that the SEC cannot prove the above point through its current argument because one cannot trade an “ecosystem,” “concept,” or “understanding.”

Kraken advanced similar arguments when it submitted a filing to dismiss its request in May.

Coinbase and Ripple cases

According to The Block, Soloman also compared the ongoing case to the SEC’s case against Coinbase, where the ecosystem concept originated. In that case, Judge Katherine Polk Failla ruled in March that the SEC had sufficiently argued that some crypto transactions on Coinbase’s platform could be considered investment contracts.

Matthew Soloman, representing Kraken, urged Judge Orrick to depart from Judge Failla’s reasoning. He criticized the concept of a “crypto ecosystem” used in the Coinbase ruling, which included various stakeholders but excluded buyers and sellers. Soloman argued that this interpretation unfairly stretches regulatory boundaries.

Meanwhile, SEC attorney Peter Moores countered that the Howey Test does not require a written contract and emphasized the importance of the substance over the form of transactions. He maintained that the framework used in the Coinbase decision was appropriate for the Kraken case as well.

Kraken has also invoked the major questions doctrine, which requires clear congressional authorization for regulatory actions of significant national impact. However, Judge Orrick appeared unconvinced by this argument, stating:

“I don’t think this is a major question. It’s not a significant expansion of regulatory authority.”

Soloman urged Judge Orrick to consider the SEC’s case against Ripple — which found that the company’s programmatic XRP sales, including exchange sales, were not securities — to determine how to handle secondary market sales of crypto.

Soloman endorsed Judge Analisa Torres’ decision in the Ripple case, calling it:

“A very practical, very well-reasoned opinion. And all it says is look at the groups of transactions and the economic reality of those transactions.”

Applying the “economic reality” principle to Kraken, Soloman said Kraken is not trading an investment contract, understandings, rights, or obligations but rather “trading a digital asset alone.”

Kraken insisted that this is not sufficient to require registration with the SEC.

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