SEC Wins Partial Victory Against Kraken in Legal Battle Over Crypto Jurisdiction

The U.S. Securities and Exchange Commission (SEC) has secured a partial win in its ongoing legal battle against the crypto exchange Kraken. A federal judge in California ruled on January 24, 2025, dismissing Kraken’s defense based on the "major questions doctrine," a key argument the exchange had used to contend that Congress had not granted the SEC authority over cryptocurrency markets.

Judge William Orrick's decision specifically targeted Kraken’s assertion that the SEC lacked jurisdiction over crypto, stating that the regulator was not attempting to wield a power "beyond what Congress could reasonably be understood to have granted it." The ruling marks a significant step in the SEC’s efforts to assert its jurisdiction over the crypto industry, with Kraken accused of offering unregistered securities.

The "major questions doctrine" is a legal principle that limits the authority of government agencies, preventing them from exercising powers not explicitly delegated to them by Congress. This doctrine has become a cornerstone of defense for several other crypto companies facing SEC lawsuits, including Coinbase, Ripple, and Binance, all of which have similarly argued that Congress has not granted the SEC authority over digital assets.

In his ruling, Judge Orrick noted that while cases invoking the major questions doctrine can have broad implications, he did not find that the cryptocurrency market had reached the level of economic importance that would warrant applying the doctrine. He pointed out that cryptocurrency, while growing, has not yet reached the economic scale of sectors like energy or student loan debt, which are often cited in major questions cases.

However, not all of Kraken’s defenses were dismissed. Judge Orrick allowed the exchange's "fair notice" defense to stand, which argues that Kraken was not adequately informed by the SEC that its activities violated securities laws. Kraken contends that it did not have "fair notice" that the SEC would consider transactions on its platform as violating the Howey test, a legal standard used to determine whether an asset qualifies as a security.

Judge Orrick indicated that Kraken had "plausibly alleged" that the SEC failed to give the exchange proper notice, and that the agency would need to demonstrate that Kraken should have reasonably understood that its activities involved investment contracts. The judge emphasized that the SEC had not yet made a compelling case to prove this.

The SEC filed its lawsuit against Kraken in November 2023, accusing the exchange of illegally operating as a securities exchange without registration. The SEC also claimed that Kraken’s parent companies, Payward Inc. and Payward Ventures, had violated securities laws since 2018 by offering unregistered securities through their platform.

The legal proceedings have been ongoing, with a U.S. federal court rejecting Kraken’s motion to dismiss the SEC’s lawsuit in August 2024. Kraken subsequently responded to the SEC’s allegations in a September filing, continuing to dispute the claims.

Despite the legal challenges, the SEC has made it clear that it is focused on regulating the crypto industry, with multiple exchanges under investigation. To better address the growing crypto market, the SEC has created a crypto task force, led by crypto-friendly Commissioner Hester Peirce, aimed at developing a regulatory framework for digital assets.

As the case progresses, the outcome could have significant implications for the broader crypto industry, particularly in terms of regulatory oversight and the scope of the SEC’s authority over digital assets.