The United States Securities and Exchange Commission (SEC) has secured a partial victory in its ongoing legal battle against the cryptocurrency exchange Kraken. A federal judge in California ruled against Kraken’s argument that the SEC lacks the authority to regulate cryptocurrency markets. Judge William Orrick’s ruling dismissed Kraken’s reliance on the “major questions doctrine,” a legal principle asserting that federal agencies cannot exercise powers not explicitly granted to them by Congress.
In his decision, Judge Orrick clarified that the SEC’s actions do not represent a significant extension of its powers beyond what Congress intended. He argued that while the cryptocurrency market is expanding, it has not reached the level of economic significance comparable to larger sectors, such as the energy market or student loan debt. This distinction is critical in assessing the regulatory scope of the SEC in relation to digital assets.
While the judge dismissed Kraken’s major questions defense, he allowed the “fair notice” defense to proceed. Kraken contended that it had not been adequately informed by the SEC about the legal expectations surrounding its operations, which could potentially infringe on due process rights. Judge Orrick noted that the SEC has not effectively demonstrated that a typical business in Kraken’s position would clearly understand that transactions on its platform qualify as investment contracts under the Howey test, which defines securities.
The SEC initiated its lawsuit against Kraken in November 2023, accusing the exchange of illegally operating as an unregistered securities exchange and alleging violations of securities laws dating back to 2018. Following the court’s denial of Kraken’s initial motion to dismiss in August, the exchange filed a challenge to the SEC’s allegations. The SEC has been actively pursuing similar actions against various crypto exchanges and has established a dedicated task force to create a regulatory framework for digital assets.
