Kraken Vs. SEC: Oral Arguments Begin, Here’s What to Know

Kraken’s motion to dismiss the lawsuit filed by the U.S. Securities and Exchange Commission (SEC) is scheduled for oral arguments today at 1 PM ET/10 AM PT. Post the ruling, the Kraken case may proceed to a phase of discovery as exemplified in the Ripple lawsuit.

The SEC accuses Kraken of being unregistered exchange and broker-dealer and asserts that 11 tokens, SOL, ADA, and ALGO, are securities.

Kraken Vs. SEC Oral Arguments Begin

During the ruling, before any argument, Judge Orrick signalled a shift towards the SEC with him asking the Kraken lawyer to try and change his mind. This statement prompted the community to suggest that the judge was to follow the Judges Rakoff and Failla rulings in the Coinbase case and deny the motion to dismiss. According to MetaLawMan, Orrick heard nothing that would change his mind.

However, Kraken lawyer challenged the approach by the SEC to digital asset “ecosystem”, a concept Judge Orrick was leaning towards. The attorney, as a result, said that this interpretation is ‘not grounded in law” hence labelling it “novel & not workable”. Concurrently, Kraken’s team asked Orrick to reconsider and try to adopt Judge Torres’s stance in the Ripple Case regarding the treatment of secondary market sales of digital assets.

In addition, the legal team questioned Judge Failla’s understanding of post-sale obligations and the investment definition under the Howey test. Despite this, the SEC made a point of the “ecosystem” (also termed “network”) saying that those purchasing digital assets are buying into something and have expectations of profit, even though there is no contractual relationship or post-sale duties.

This approach implies that the court should consider the bigger picture which includes promotional materials and issuer statements, including even the information posted on Kraken’s website, when determining what constitutes an investment contract under the Howey Test. Consequently, this means the Kraken case will likely go on to years of discovery.

Precedents of the Kraken Case

The SEC has accused Kraken of running an unregistered securities exchange, Kraken also has been accused of operating as an unregistered broker-dealer and also of operating as an unregistered securities clearing agency. The SEC stated that 11 tokens listed on Kraken, including ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL, are securities. Kraken’s dismissal motion relies on the Howey Test, stating that the SEC has not alleged that any securities transactions occurred on its exchange.

Kraken had filed a reply to the SEC lawsuit, arguing that the agency’s case is weak and that the suit should be dismissed. In its latest response, Kraken strongly refutes the SEC’s allegations of trading unregistered securities.

The exchange, therefore, said that the SEC did not correctly identify the investment contracts that are tradeable on the exchange and took issue with some of the terms used by the SEC, such as ‘investment concept’ and ‘ecosystem’, saying that these should have been ‘investment contract’ and ‘enterprise’ respectively.

Similarly, Kraken has received support for its motion to dismiss from Senator Cynthia Lummis, the Blockchain Association, the DeFi Education Fund, the Chamber of Digital Commerce, the Investor Choice Advocates Network, Paradigm, and two administrative law scholars. These entities have filed briefs in support of Kraken’s position.

Comparison with Coinbase Case

The legal community is waiting to see whether the SEC will employ the same arguments in Kraken’s case as in the Coinbase motion to dismiss the hearing. In that case, the SEC claimed that tokens’ ecosystems make them fall under the Howey Test to be classified as securities. The SEC will examine this argument to determine if this is still applicable in the current situation.

Moreover, Kraken relies on the SEC cases on initial coin offerings (ICOs) to back its argument. The crypto exchange notes that these cases concerned contractual rights and obligations, which is consistent with Kraken’s view of investment contracts.

Coinbase’s Chief Legal Officer, Paul Grewal, has earlier on accused the SEC of making contradictory arguments. In a similar case against Coinbase, the SEC again claimed that most of the supported tokens are investment contracts, using the Howey Test. As per Coinbase, the SEC’s mixed signals and unequal enforcement actions have led to legal ambiguity in the digital asset market.

BTC and ETH Commodity Status

The SEC has allocated commodity status to Bitcoin (BTC) and Ethereum (ETH) through the approval of spot ETFs, although SEC Chair Gary Gensler has not publicly addressed ETH’s status.

Bitcoin and Ethereum have arguably the two largest “ecosystems” behind them, raising questions about why other tokens with significant ecosystems are classified differently.

The crypto community and legal experts will closely follow today’s arguments to understand how the SEC’s stance on what constitutes security may evolve. This case, along with the Coinbase lawsuit, could set significant precedents for the regulatory landscape of digital assets in the United States.

Read Also: Kraken Disputes SEC Claims, Cites Previous ICO Cases for Support