The U.S. Securities and Exchange Commission (SEC) has secured a partial victory in its ongoing legal battle with Kraken, the cryptocurrency exchange, after a California federal judge dismissed one of Kraken’s central defenses. The case revolves around allegations that Kraken offered unregistered securities, violating federal securities laws.
Judge Rejects Kraken’s Major Questions Doctrine Defense
On Jan. 24, Judge William Orrick ruled to dismiss Kraken’s argument based on the “major questions doctrine.” This defense claimed that the SEC was overstepping its authority by attempting to regulate the cryptocurrency market, a sector that Kraken argued Congress had not explicitly granted the agency power over.
Judge Orrick, however, found that the SEC was not asserting “highly consequential power beyond what Congress could reasonably be understood to have granted it.” He added that while cryptocurrency is a growing financial instrument, its current economic significance does not rival sectors like energy or student loan markets, which are often cited in major questions doctrine cases.
The major questions doctrine has been a popular defense among crypto firms like Coinbase, Ripple, and Binance in similar cases. It asserts that federal agencies cannot wield powers not explicitly delegated to them by Congress. Judge Orrick’s decision to reject this argument against the SEC could have implications for other cases involving crypto companies.
Fair Notice Defense Still in Play
While the judge struck down Kraken’s major questions doctrine argument, he allowed the exchange to proceed with its “fair notice” defense. Kraken had argued that the SEC failed to provide adequate notice that its activities violated securities laws, potentially infringing on its due process rights.
“The SEC would have to show that any ordinary entity in Kraken’s position would understand that the Howey test, as applied to the secondary market transactions on Kraken’s platform, establishes that those transactions are investment contracts,” Judge Orrick stated. “It has not made such a showing.”
The Howey test, a legal standard for determining whether a transaction qualifies as an investment contract, has been a cornerstone of the SEC’s enforcement strategy against crypto firms. However, the lack of clear regulatory guidance has been a recurring complaint from industry participants.
Background on SEC Enforcement Actions in Crypto
The SEC has ramped up enforcement actions against the cryptocurrency sector in recent years, targeting exchanges, token issuers, and other entities it claims are operating outside the bounds of securities laws.
Under the leadership of Chair Gary Gensler, the agency has taken a more aggressive stance, filing lawsuits against major players like Coinbase, Ripple, and Binance. These actions often revolve around accusations of offering unregistered securities or operating as unregistered securities exchanges.
However, the SEC’s approach has sparked controversy. Critics, including Commissioner Hester Peirce—known for her pro-crypto stance—have argued that the agency’s tactics create uncertainty and stifle innovation. In response, the SEC established a specialized crypto task force to address the unique challenges posed by digital assets, but the industry continues to call for clearer regulatory guidelines.
Timeline of the Kraken Lawsuit
The SEC filed its lawsuit against Kraken in November 2023, alleging that the exchange had been operating as an unregistered securities exchange since 2018. The suit also accused Kraken’s parent companies, Payward Inc. and Payward Ventures, of violating federal securities laws.
Kraken’s initial attempt to have the case dismissed was denied by a U.S. federal court in August 2024. The exchange responded with a formal dispute of the SEC’s allegations in a September filing, raising several defenses, including the major questions doctrine and the fair notice argument.
The current ruling marks a critical moment in the case, as the dismissal of the major questions doctrine defense weakens Kraken’s position. However, the survival of the fair notice defense ensures that key questions about regulatory clarity will remain central to the case.
