A California-based federal judge ruled against dismissing the SEC lawsuit against crypto exchange Kraken. 

The ruling dismisses Kraken efforts to drop the charges leveled by the Securities and Exchange Commission (SEC), as the federal judge held on Friday.

The charges arise from the lawsuit filed in November last year in the Northern District of California’s District Court. The court filings capture allegations that Kraken runs an unregistered securities exchange‌. The ruling thwarts Kraken’s efforts to dismiss the lawsuit. 

SEC Lawsuit Against Kraken

Judge William Orrick noted that the SEC plausibly alleges that several crypto transactions facilitated by Kraken constitute investment contracts. Such constitute securities and are subject to the securities laws. 

The legal complaint by the SEC asserts several token securities, including ADA, NEAR, MATIC, FLOW, MANA, OMG, ATOM, FIL, ICP, MATIC, OMG, ALGO, and SOL. The regulator revealed in the court filings that the transactions executed involving the tokens are under its jurisdiction.

Kraken chief legal executive Marco Santori considers that while the Friday ruling allows discovery in the lawsuit to proceed, such is a critical win for the crypto exchange. 

Santori revealed in a Friday post on X that the court reiterated the distinction witnessed in the Ripple case. The token is not a security, and only agreements around such could qualify.

The new turn in the SEC’s case ends the months-long tussle with the crypto exchange. Notably, Kraken initiated several attempts to have the lawsuit dismissed since the onset of this year. 

Kraken’s defense team argued in February that the SEC failed to show the transactions executed on the platform qualify as investment contracts per the Howey Test.

The Howey Test helps ascertain whether the investment is under the regulators’ jurisdiction within the country. 

Kraken lawyers indicated that the SEC failed to illustrate the investment contracts traded, settled, or brokered on the platform, court records reveal. The ruling requires Kraken to respond to the SEC complaint within 20 days. 

Australian Court Finds Kraken’s Bit Trade Noncompliant 

Meanwhile, Kraken woes in court are yet over, and an Australian court is siding with the regulator. The court held that Kraken’s local subsidiary, Bit Trade, was noncompliant with obligations involving the design and distribution of the margin trading product.

The Federal Court of Australia admitted the country’s corporate regulator, ASIC, argument in the case leveled against Bit Trade Pty Ltd – the local operator of Kraken’s crypto exchange in the country.

In a ruling delivered late Thursday, August 22, the Federal Court held Bit Trade guilty of non-compliance with the obligations stipulated by the ASIC on the design and distribution of margin trading products.

The late Thursday ruling indicates that Bit Trade contravened the legal obligations. It supported the Australian Securities and Investments Commission (ASIC) view when initiating the civil penalty proceedings in September.

The margin extension product by Bit Trade, accessible to Kraken’s Australian customers since October 2021, is at the center of the lawsuit. The court held that Bit Trade contravened the law when offering the product without the requisite target market determination (TMD) as Australia’s Corporations Act stipulates. 

Justice Nicholas noted that Section 994B(2) obligates companies to ascertain the target market for their financial products before their offer. The TMD outlines how to sell the product to the appropriate target market. 

Justice Nicholas singled out the provision to ensure that the design and marketing of the financial product satisfy the right customers’ needs. Doing so will protect the customers from potential financial harm. 

While the obligations to settle digital assets hardly constitute a deferred debt, Justice Nicholas held that the requirement to settle using national currencies did. As such, this finding classifies the product as a credit facility under the law, aligning with the ASIC’s position.

ASIC deputy chair Sarah Court stated that the ruling is critical for the regulator as it involves a global crypto firm. The executive added that the ASIC will scrutinize products within the crypto industry to ensure their compliance and protect consumers. 

The ruling offers Bit Trade and ASIC seven days to agree on the injunctions and declarations. The regulator will likely seek financial penalties later. 

Bit Trade secured registration with AUSTRAC as a subsidiary of US-based Payward Incorporated to operate the Kraken branch in Australia. Although expressing disappointment, Kraken affirmed the willingness to comply with the decision.