District Court Denies Crypto Exchange Motion to Dismiss; SEC Case Moves Forward

A US District Court found that the SEC "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." As a result, the Court denied the crypto trading platform's Motion to Dismiss and allowed the case to proceed to trial.

Before the US District Court for the Northern District of California, the SEC alleged that crypto exchange, Kraken, operates as an unregistered broker-dealer, exchange and clearing agency in connection with crypto asset securities trading. Analyzing the issues under the Howey test, the Court found the crypto tokens traded on the exchange were not securities, however, contracts surrounding their sale could be considered investment contracts and are thereby subject to SEC regulation. As a result, the Court found that the SEC's allegations were sufficient to allow the case to proceed to trial. The Court did not address whether specific features of Kraken's operations, such as its "Instant Buy" function or "over-the-counter trading desk," might independently constitute regulated activities under securities laws.

The Court set a case management conference and ordered the parties to prepare for the next steps in litigation.