A significant development occurred on January 24, 2025, in the legal dispute between the US Securities and Exchange Commission (SEC) and crypto exchange Kraken.
In a notable ruling, a federal judge in California sided partly with the SEC, dealing a blow to Kraken.
Kraken's defense invoking the 'major questions' doctrine was dismissed by the judge, although the 'fair notice' and 'due process' defenses were permitted to proceed.
The SEC had filed a lawsuit against Kraken, alleging the offering of unregistered securities through its exchange services. Despite Kraken presenting eighteen defenses, the SEC aimed to have some, including the 'major questions doctrine' defense, thrown out.
The 'major questions doctrine' posits that government agencies require specific authorization from Congress to regulate significant sectors of the economy. Kraken argued that the SEC lacked clear jurisdiction over cryptocurrencies.
Nonetheless, Judge William Orrick ruled otherwise, emphasizing that while the cryptocurrency sector is expanding, it does not wield comparable economic influence to sectors like energy or student loans. He emphasized that the SEC's actions were grounded in established securities laws rather than an overreach of authority.
Although the 'major questions' defense was dismissed, Kraken's assertion of lacking 'fair notice' and clarity regarding its legal violations was upheld. The exchange maintained that it was unaware that specific digital assets on its platform could be classified as "investment contracts" under the Howey test, a precedent-setting Supreme Court judgment on securities.
Judge Orrick acknowledged the validity of Kraken's argument and allowed the 'fair notice' defense to proceed while dismissing the 'major questions doctrine'.
This ruling holds significance in the backdrop of regulatory scrutinization of the crypto sector, with other entities like Coinbase and Binance also contesting the SEC's authority in regulating crypto assets. The SEC's attempts to subject cryptocurrencies to conventional securities regulations have encountered legal pushback.
The SEC's legal action against Kraken, initially filed in November 2023 on grounds of operating as an unregistered securities entity, broker, dealer, and clearing agency, underlines the broader conflict between regulatory bodies and the rapidly evolving crypto industry.