The US Securities and Exchange Commission (SEC) has decided to drop its lawsuit against cryptocurrency exchange Kraken. This decision is part of a larger shift in how regulators are handling crypto businesses.
The lawsuit, which was originally filed in November 2023, accused Kraken of operating without the necessary registrations.
However, with this case now dismissed, Kraken is free to continue its operations without paying penalties or making any changes to its business model.
This move comes at a time when the SEC has been backing away from other lawsuits against major crypto companies.
Over the past few weeks, the agency has also dropped cases against Coinbase, Uniswap Labs, Robinhood Crypto, OpenSea, and others.
These developments suggest that the SEC may be changing its strategy when it comes to regulating the crypto industry.
Why was Kraken sued?
The SEC’s lawsuit against Kraken was part of a broader crackdown on the cryptocurrency industry in the US.
The agency alleged that Kraken was operating as an unregistered securities exchange, broker, dealer, and clearing agency.
In simpler terms, the SEC claimed that Kraken was handling securities transactions without following the proper legal procedures.
In addition, the lawsuit raised concerns that Kraken was mixing customer funds with its own corporate funds, which could pose a risk to users. However, Kraken strongly denied these allegations and fought back against the SEC’s claims.
Kraken described the lawsuit as “politically motivated” and argued that it was based on a misunderstanding of how crypto businesses operate.
The exchange maintained that it had always followed clear principles of compliance and consumer protection. “This is not just a legal victory – it’s a turning point for the future of crypto in the United States”, Kraken said in a statement after the case was dismissed.
What does this mean for the SEC?
For years, the SEC has taken an aggressive approach to regulating cryptocurrency. Under former SEC Chair, Gary Gensler, the agency launched multiple lawsuits against crypto companies, arguing that many digital assets should be classified as securities.
Critics of this approach called it “regulation by enforcement”, meaning that instead of creating clear rules for crypto companies to follow, the SEC was suing businesses after the fact.
However, recent changes in government leadership appear to have influenced the agency’s stance on crypto regulation. Kraken acknowledged this shift, stating, “We appreciate the new leadership both at the White House and the Commission that led to this change”.
The SEC has also introduced a new division called the Cyber and Emerging Technologies Unit (CETU), which focuses on tackling fraud in digital assets rather than taking broad legal action against crypto companies.
This suggests that the agency may be moving towards a more structured regulatory framework instead of relying solely on lawsuits. The decision to drop the lawsuit against Kraken is seen as a positive step for the crypto industry.
Many industry leaders believe this could signal the end of the SEC’s aggressive enforcement actions and the start of a more balanced approach to regulation.
Kraken and other crypto businesses now have more clarity on their legal standing, which could encourage more investment and innovation in the sector.
“This victory paves the way for a stable regulatory environment—one that encourages investment, fosters responsible growth, and ensures the US remains a leader in the digital asset economy”, Kraken said in its statement.
Despite these recent reversals, there is still some uncertainty about how the SEC will handle crypto regulation moving forward.
Some believe that the agency is reassessing its legal strategy ahead of potential new legislation, while others think the SEC may have struggled to prove its cases in court. Either way, the agency’s recent actions indicate a shift in direction.
SEC ends investigation into Yuga Labs
In another major decision, the SEC has also closed its investigation into Yuga Labs, the company behind the popular Bored Ape Yacht Club (BAYC) non-fungible tokens (NFTs).
This investigation, which began in October 2022, examined whether Yuga Labs’ NFTs and its associated cryptocurrency, ApeCoin, should be classified as securities under US law.
The SEC’s decision to drop the case without taking any enforcement action is a significant win for the NFT industry.
Yuga Labs welcomed the decision, stating, “After more than three years, the SEC has officially closed its investigation into Yuga Labs. This is a huge win for NFTs and all creators pushing our ecosystem forward”. The company also reaffirmed its stance that NFTs are not securities.
The SEC originally launched its investigation into Yuga Labs to determine whether its digital assets fell under the category of securities. The agency applied the Howey Test, a legal standard used to decide whether a financial asset qualifies as a security.
If the SEC had ruled that Yuga Labs’ NFTs or ApeCoin were securities, it could have led to stricter regulations and legal challenges for the company.
Despite the investigation, Yuga Labs continued its operations and maintained its position that NFTs should not be classified as securities.
The company, which reached a $4 billion valuation after raising $450 million in funding, has been a major player in the NFT market.
The BAYC collection has generated billions of dollars in trading volume, making it one of the most well-known NFT brands.
Similar to its decision to drop the lawsuit against Kraken, the SEC’s move to end its investigation into Yuga Labs suggests that the agency may be stepping back from its aggressive legal actions against digital asset companies.
The NFT market has seen significant fluctuations over the past few years. While BAYC NFTs were once valued as high as 153 $ETH during the last crypto bull run, their prices have since dropped by over 90%.
However, the SEC’s decision to end its investigation removes a major legal threat that could have further impacted the industry.
For the broader crypto space, these developments indicate that US regulators may be shifting towards clearer and more predictable guidelines rather than relying on enforcement actions.
The SEC has also replaced its crypto division with the Cyber and Emerging Technologies Unit, which is expected to focus on preventing fraud and ensuring market integrity rather than taking broad legal action against crypto firms.
