Kraken's Motion to Dismiss SEC Lawsuit Denied by US Court

The U.S. District Court for the Northern District of California has denied Kraken’s motion to dismiss a lawsuit by the U.S. Securities and Exchange Commission (SEC).

The U.S. District Court for the Northern District of California has denied a motion to dismiss the lawsuit by the U.S. Securities and Exchange Commission (SEC) against Payward Inc. and Payward Ventures, which operate as crypto exchange Kraken, according to a court order filed on Friday.

The SEC alleges that Kraken operated as a broker, dealer, exchange, and clearing agency for transactions involving crypto asset securities without registering with the regulator. According to the SEC, Kraken facilitates the trading of various cryptocurrencies that the SEC claims are “investment contracts” under the Securities Act.

The court ruled that the SEC had “plausibly alleged” that some of Kraken’s cryptocurrency transactions could be considered investment contracts, which are subject to securities laws. This means that the judge found the SEC’s allegations credible enough to warrant further examination through discovery and trial. The court document reads:

“The SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws. The motion is denied.”

Specifically, the SEC alleges that Kraken has made available for trading several crypto assets, including ADA (cardano), ALGO (algorand), ATOM (cosmos), FIL (filecoin), FLOW (flow), ICP (internet computer), MANA (decentraland), MATIC (polygon), NEAR (near protocol), OMG (OMG network), and SOL (solana). These assets, according to the SEC, are traded on Kraken’s platform in a manner that constitutes investment contracts and are therefore subject to securities laws. Kraken argues that the transactions it facilitates do not involve securities and thus do not fall within the SEC’s regulatory purview.

Judge William H. Orrick emphasized that “the Howey test applies wherever a court seeks to determine whether a transaction involves an investment contract, regardless of whether that transaction is on a primary or secondary market.” Although the court’s decision permits the SEC’s lawsuit to move forward, it does not represent a final judgment that the crypto assets are securities. Instead, it allows the SEC to present its case and attempt to prove its claims in court.

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