In a significant legal setback for one of the crypto industry’s biggest exchanges, a California judge has ruled that cryptocurrency platform Kraken must face a lawsuit brought by the US Securities and Exchange Commission (SEC).

Kraken Faces Uphill Legal Battle

The SEC alleges that Kraken has been operating an unregistered securities exchange, a charge the firm has vehemently denied. But in a Friday ruling, US District Judge William H. Orrick in San Francisco found the SEC’s argument that certain crypto tokens sold on Kraken’s platform constitute “investment contracts” and therefore securities subject to the agency’s oversight to be “plausible.”

The ruling denies Kraken’s motion to dismiss the SEC’s lawsuit, which was filed in November 2022. Judge Orrick stated in his opinion:

The SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws.

Kraken had argued, similar to the defense put forth by blockchain payments company Ripple in its ongoing battle with the SEC, that the agency lacks jurisdiction over digital assets.

The firm contended that as an exchange or “secondary market” platform, it is subject to different regulations than the direct issuance of tokens, as was the case with the SEC’s actions against Terraform Labs.

However, Judge Orrick rejected Kraken’s attempt to draw a distinction, ruling that the SEC’s claims against the exchange were “acceptable.” This marks a significant win for the regulator, which under Chair Gary Gensler has taken an increasingly aggressive stance against the crypto industry, arguing that most digital tokens are unregistered securities.

Escalating Crypto Crackdown

The Kraken decision comes on the heels of a mixed bag of rulings for the SEC in other high-profile crypto cases. While a Manhattan federal judge last year found that Ripple’s XRP token sales to the general public were not subject to SEC jurisdiction, other courts have sided with the agency, including in its cases against Terraform Labs and Coinbase.

The Ripple ruling, which limited the SEC’s authority only to XRP sales to institutional investors, was seen as a major victory for the crypto industry. However, the exchange was recently ordered to pay a $125 million civil penalty – a fraction of the nearly $2 billion the SEC had sought.

For Kraken, the California court’s refusal to dismiss the SEC’s lawsuit means the exchange now faces the prospect of a protracted legal battle over the regulatory status of the crypto assets traded on its platform.