Kraken, one of the biggest cryptocurrency exchanges, has requested a jury trial in response to a lawsuit filed by the US Securities and Exchange Commission (SEC).
The SEC had accused Kraken of violating federal securities laws by not registering its platform. Kraken strongly denied the charges, arguing that the digital assets in question are not securities and that the SEC has no authority over them.
This legal battle is part of a larger effort by the SEC to regulate the crypto industry.
SEC’s allegations against Kraken
The lawsuit was filed by the SEC in the US District Court for the Northern District of California last November.
The regulator claimed that Kraken has been engaging in unregistered securities activities, meaning it failed to comply with the legal requirements that apply to traditional financial markets.
Specifically, the SEC wants the court to issue a permanent order stopping Kraken from continuing these alleged violations and is also seeking financial penalties.
The SEC’s case focuses on 11 specific tokens, which it claims are unregistered securities. These tokens include $ADA, $ALGO, $ATOM, $FIL, $FLOW, $ICP, $MANA, $MATIC, $NEAR, $OMG, and $SOL.
In the SEC’s view, Kraken should have registered these tokens and followed the rules set for securities exchanges, brokers, and clearinghouses.
However, Kraken firmly denied the SEC’s accusations, stating that these tokens are not securities. In a recent court filing, Kraken argued,
“Kraken did not violate Sections 5, 15(a) and 17A of the Securities Exchange Act of 1934 because ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, and SOL[…] are not securities or investment contracts”.
The company is using the “Howey Test” as the basis for its argument, which is a legal standard used to determine what qualifies as an investment contract under US law.
Kraken’s legal arguments
Kraken’s main argument is that digital assets, such as the tokens listed in the lawsuit, do not fit the definition of a security.
According to the Howey Test, a security typically involves an investment of money in a common enterprise with the expectation of profit from the efforts of others.
Kraken argued that the tokens in question do not meet these criteria, and therefore, the SEC has no authority to regulate them.
The company also disputes the SEC’s claim that Kraken operates as an unregistered exchange, broker-dealer, or clearinghouse.
“The digital assets themselves cannot be the investment contracts because they carry none of the rights and obligations of a share of stock, a bond, or any other financial asset that Congress has said is subject to SEC regulation”, Kraken stated.
The company insists that it has never needed to register with the SEC because its activities do not fall under the regulations that govern traditional financial markets.
Kraken’s filing goes on to argue that the SEC has overstepped its boundaries.
The exchange says that the regulator has not provided clear guidance on how securities laws should apply to digital assets, leading to confusion and uncertainty within the crypto industry.
“The SEC has no authority to regulate Kraken’s digital asset trading platform[…] because the Digital Assets are not securities or investment contracts”, the filing reads.
Kraken’s services and first amendment claim
Kraken acknowledges that it provides a wide range of services, including the listing of over 220 crypto assets globally, margin trading, over-the-counter trading, and instant buy features.
However, it strongly denies that offering these services makes it a securities exchange or broker-dealer. Kraken insists that it has operated lawfully within the framework of the crypto industry.
In a bold move, Kraken also claimed that the SEC violated its First Amendment rights by acting without proper notice or due process.
The company argues that it has been unfairly targeted for simply exercising its legal rights to provide crypto trading services.
Kraken believes that the SEC’s actions have been excessive and that the regulator is attempting to control an area of the market that falls outside its authority.
Its request for a jury trial reflects its confidence in its legal strategy and its commitment to challenging the SEC’s claims.
The exchange is prepared to fight the case in court, arguing that digital assets should not be treated as traditional securities and that the SEC’s actions are based on misinterpretations of the law.
