TLDR
- Federal judge William Orrick rejected Kraken’s major questions doctrine defense against the SEC, ruling that crypto hasn’t reached an economic scale comparable to energy markets or student loan debt
- The judge preserved Kraken’s “fair notice” defense, acknowledging the exchange plausibly argued the SEC didn’t properly notify them of violations
- The SEC sued Kraken in November 2023 for allegedly operating an unregistered securities exchange since 2018
- Other major crypto exchanges including Coinbase, Ripple, and Binance have used similar defense strategies against SEC actions
- The SEC has formed a crypto task force under Commissioner Hester Peirce to develop digital asset frameworks
A California federal judge has struck down a key element of Kraken cryptocurrency exchange’s legal defense against the Securities and Exchange Commission (SEC), while allowing another important defense argument to proceed. The ruling, issued on January 24, marks a pivotal development in the ongoing legal battle between the SEC and one of the largest crypto exchanges in the United States.
Judge William Orrick dismissed Kraken’s use of the major questions doctrine defense, which argued that Congress hadn’t explicitly granted the SEC authority over cryptocurrency markets. The judge determined that cryptocurrency markets haven’t yet reached a level of economic importance comparable to sectors like energy or student loan debt, where the doctrine typically applies.
In his ruling, Judge Orrick explained that cases involving the major questions doctrine usually concern issues that could have massive influence over the American economy. While acknowledging cryptocurrency’s growth, he stated that the industry hasn’t achieved the same economic scale as other sectors where the doctrine has been successfully applied.
However, the court’s decision wasn’t entirely in the SEC’s favor. Judge Orrick preserved Kraken’s “fair notice” defense, finding that the exchange had made a plausible case that the SEC failed to provide adequate warning about potential violations of securities laws. This aspect of the ruling suggests that the SEC must demonstrate that any ordinary company in Kraken’s position would understand how the Howey test applies to secondary market transactions on their platform.
The legal dispute began in November 2023 when the SEC filed suit against Kraken, alleging that the exchange had been operating illegally as an unregistered securities exchange since 2018. The SEC’s complaint targeted both Payward Inc and Payward Ventures, which operate under the Kraken brand name.
The case has moved through several phases since its initial filing. In August, a US federal court denied Kraken’s attempt to have the lawsuit dismissed entirely. Following this setback, Kraken filed a response in September challenging the SEC’s allegations.
Kraken isn’t alone in its legal strategy against the SEC. Other major cryptocurrency exchanges, including Coinbase, Ripple, and Binance, have employed similar defenses in their own battles with the regulator, particularly the major questions doctrine argument that Judge Orrick has now rejected in Kraken’s case.
The exchange had presented eighteen different affirmative defenses in response to the SEC’s complaint. The recent ruling specifically addressed three of these defenses, with the major questions doctrine being the only one completely dismissed.
The preservation of the fair notice defense represents a continuing challenge for the SEC. Judge Orrick noted that the regulator has not yet successfully demonstrated how companies like Kraken should have known their operations violated securities laws under the Howey test, which is used to determine what qualifies as an investment contract.
Meanwhile, the SEC has shown signs of evolving its approach to cryptocurrency regulation. The agency has established a dedicated crypto task force under the leadership of Commissioner Hester Peirce, who is known for her more crypto-friendly stance. This task force is working to develop a framework for digital assets.
The ruling comes at a time when the SEC has intensified its enforcement actions against cryptocurrency exchanges. These actions form part of a broader regulatory campaign to bring the crypto industry under traditional securities law frameworks.
The case continues to move forward with both sides preparing for the next phases of litigation. Kraken maintains its ability to argue that it lacked fair notice of potential securities violations, while the SEC proceeds with its core argument that the exchange operated without proper registration.
The latest developments in the case occurred against the backdrop of ongoing regulatory scrutiny of the cryptocurrency industry. The SEC’s enforcement division continues to investigate and pursue actions against various crypto industry participants.
