A U.S. federal judge has rejected Kraken's motion to dismiss the lawsuit brought by the Securities and Exchange Commission (SEC), according to an August 23 report by Bloomberg News. The SEC's lawsuit accuses Kraken of operating an unregistered securities exchange, broker, dealer, and clearing agency.

Kraken had sought to have the case, which was filed by the SEC in November, dismissed. The regulator's complaint alleges that Kraken has facilitated the illegal trading of securities, generating hundreds of millions of dollars since 2018. The SEC argues that by not registering as a securities broker, Kraken has denied its customers protections such as regulatory inspections, safeguards against conflicts of interest, and adherence to recordkeeping requirements.

The case will proceed

In its motion to dismiss, Kraken argued that the SEC's claims are baseless and rooted in a misinterpretation of securities laws. The exchange maintained that the SEC is trying to apply outdated regulations to the fast-evolving crypto industry without providing clear guidance. Kraken also contended that its staking services, which are central to the SEC's case, do not amount to an unregistered securities offering.

However, Judge William H. Orrick ruled in favor of the SEC, stating that the agency has "plausibly alleged" that some of the cryptocurrency transactions facilitated by Kraken could be considered investment contracts and thus fall under securities laws. This ruling is in line with SEC Chair Gary Gensler's position that most digital tokens are unregistered securities subject to SEC regulation. The case, titled Securities and Exchange Commission v. Payward Inc., will continue in the U.S. District Court for the Northern District of California.

As of the time of reporting, neither Kraken nor the SEC had responded to requests for comment.

This legal setback comes as Kraken is reportedly planning to raise $100 million in a final funding round before a potential initial public offering (IPO) in 2025.

Kraken vs. ASIC

On August 23, Kraken also lost a legal battle with the Australian Securities and Investments Commission (ASIC). The Australian Federal Court ruled that Bit Trade Pty, which operates Kraken in Australia, failed to comply with ASIC rules regarding the distribution of margin trading products.

ASIC argued that Bit Trade has been offering "margin extension" without proper compliance since October 5, 2021, violating section 994B(2) of the Corporations Act each time the product was offered to a customer.

The parties have seven days to agree on declarations and injunctions, with ASIC stating its intention to seek financial penalties against Bit Trade.