SEC Wins Partial Victory as Judge Rejects Kraken’s Jurisdiction Defense

A California federal judge has ruled in favor of the U.S. Securities and Exchange Commission (SEC), dismissing a defense from Kraken, the popular crypto exchange, that Congress had not granted the regulator authority over cryptocurrency.

In a ruling on January 24, Judge William Orrick dismissed Kraken’s “major questions doctrine defense,” one of three arguments the SEC sought to have removed in its lawsuit against the exchange. The SEC alleges that Kraken offered unregistered securities, marking a partial win for the regulator in the ongoing legal battle.

Judge Orrick ruled that the SEC was not claiming authority that was “exceedingly broad” or “beyond what Congress could have reasonably delegated” to the agency. He also determined that the SEC’s actions, in this case, did not represent an overextension of its regulatory authority, clarifying that the major questions doctrine typically applies to matters with broad economic impact, such as the energy sector or student loan debt, rather than the cryptocurrency industry.

Judge Orrick further concluded that, despite its growth, cryptocurrency has not yet attained the same level of economic significance as other sectors.

Crypto companies such as Coinbase, Ripple, and Binance have relied on the major questions doctrine in their legal cases, which asserts that government agencies cannot exercise authority unless explicitly granted by Congress. These firms argue that Congress has not specifically authorized the SEC to regulate the cryptocurrency industry.

Although the ruling bolstered the SEC’s stance in its case against Kraken, the exchange successfully retained its “fair notice” defense, claiming that the SEC did not adequately inform it that its operations were in violation of securities laws.

Additionally, Judge Orrick acknowledged Kraken’s claim of lack of ”fair notice,” which could raise concerns about due process. He noted that the SEC must prove that a typical entity like Kraken would reasonably understand how the Howey Test—used to determine whether something qualifies as a security—applies to transactions on its platform. The judge stated that the SEC had not yet provided sufficient evidence to support that claim.

In November 2023, the SEC filed a lawsuit against Kraken, accusing the company of operating as an unregistered securities exchange. The regulator also alleged that Kraken’s parent companies, Payward Inc. and Payward Ventures, have been in violation of securities laws dating back to 2018.

The case has progressed through multiple phases, including a decision in August by a U.S. federal court that rejected Kraken’s attempt to have the SEC’s lawsuit dismissed.

Michaela has no crypto positions and does not hold any crypto assets. This article is provided for informational purposes only and should not be construed as financial advice. The Shib Magazine and The Shib Daily are the official media and publications of the Shiba Inu cryptocurrency project. Readers are encouraged to conduct their own research and consult with a qualified financial adviser before making any investment decisions.

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