SEC's Case Falters, Kraken Stands Firm

In a recently declared case, the Federal Court for the Northern District of California has said that no token traded on Kraken can be considered a security.

A federal court in California has ruled that tokens traded on the Kraken cryptocurrency exchange are not considered securities, dealing a blow to the U.S. Securities and Exchange Commission (SEC) in its case against the exchange.

The court's decision comes after the SEC filed a lawsuit against Kraken in December, alleging that the exchange offered and sold unregistered securities in the form of cryptocurrencies to U.S. customers. The SEC argued that seven of the tokens listed on Kraken's exchange met the definition of a security under the Howey Test.

However, in its ruling on Monday, the court found that the SEC's definition of a "crypto asset security" was "unclear at best, and confusing at worst." The court also rejected the SEC's argument that a token could not be considered a security without a written contract.

"The court finds that, as a matter of law, none of the tokens trading on Kraken are securities," the ruling stated.

The court's decision is a significant victory for Kraken, which has maintained that it does not list securities on its exchange. The ruling also provides clarity for cryptocurrency users on the legal status of tokens traded on Kraken.

"This court ruling is in the best interest of Kraken, and is relatively clear to the users of cryptocurrencies throughout the world," Marco Santori, Kraken's chief legal officer, wrote in a series of posts on Monday.

Despite the court's ruling, the SEC is still able to proceed with the discovery phase in the case. This means that the SEC will be able to gather evidence and testimony from Kraken in order to determine whether or not the exchange's activities violated any other securities laws.

The court's decision to allow the discovery phase to proceed is likely due to the fact that the court has previously ruled that agreements connected with a token can be considered a security, even if the token itself is not.

"The court finds that SEC has shown a good-faith basis for arguing that the agreements connected with the tokens at issue in this case—specifically, the purchase and sale of the tokens on Kraken's exchange—are securities," the ruling stated.

The SEC is expected to continue its investigation into Kraken's activities in the discovery phase, and may ultimately decide to pursue further charges against the exchange.

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