A federal judge in California signaled that he is inclined to allow the US Securities and Exchange Commission’s (SEC) lawsuit against Kraken to move forward, raising questions about the exchange’s attempts to have the case dismissed, various media reports indicated.
The Block reported that Judge William Orrick expressed that he was leaning towards denying Kraken’s request as the exchange presented its oral arguments for dismissal. The judge noted that it was “plausible” that the digital assets available on the platform could be considered and sold as investment contracts.
FOX Business reporter Eleanor Terrett shared that the judge seemed to align with the SEC’s arguments at the start of the hearing and remained convinced after reviewing the briefs from both parties. The legal experts she spoke to believed that the case would progress to discovery following the proceedings on June 20.
Despite indicating his inclination to deny dismissal, Judge Orrick did not make a final decision by the end of the hearing and stated that he planned to thoroughly review the arguments presented by both parties.
Kraken’s lawyer, Matthew Solomon, contested the SEC’s “ecosystem” argument, which suggests that the exchange’s web pages for specific assets contain information that promotes those assets with the intention of influencing their prices. Solomon argued that merely showing an asset is a security is not enough; the SEC must also demonstrate that Kraken traded or cleared the alleged security.
Solomon pointed out that trading entities cannot trade an “ecosystem,” “concept,” or “understanding,” which the SEC’s argument fails to establish. Kraken had previously raised similar points in a filing to dismiss the case in May.
In discussions comparing the case to the SEC’s litigation against Coinbase, Solomon criticized the concept of a “crypto ecosystem” and emphasized that the regulatory boundaries were unfairly stretched in the Coinbase ruling. The SEC countered that the framework used in the Coinbase decision was appropriate for the Kraken case as well.
Kraken invoked the major questions doctrine, which requires clear congressional authorization for regulatory actions with significant national impact. However, Judge Orrick seemed skeptical of this argument, remarking that he did not view it as a major question that necessitated a significant expansion of regulatory authority.
Solomon urged Judge Orrick to consider the SEC’s case against Ripple as a guide for handling secondary market sales of crypto assets. He praised Judge Analisa Torres’ reasoning in the Ripple case, which focused on analyzing the economic reality of transactions to determine whether they constituted securities.
Applying the “economic reality” principle to Kraken, Solomon argued that the exchange was not trading investment contracts, understandings, rights, or obligations, but instead was engaging in the trading of digital assets alone. Kraken maintained that this distinction did not warrant registration with the SEC.
