A federal judge has tossed Kraken’s use of the major questions doctrine defense in the case it faces from the Securities and Exchange Commission, dealing a partial win to the regulator in one of its ongoing cases against cryptocurrency exchanges.
The SEC had petitioned Judge William Orrick to toss three defenses Kraken was using against the SEC, which had accused the company of operating an unregistered exchange. The major questions doctrine, which states that Congress does not delegate to government agencies issues of major political or economic significance, was one such defense.
Orrick struck it down, noting that despite crypto’s growth, “it has not risen to a level of economic import” that could have the “potential to impose massive influence over the American economy.” The SEC, Orrick wrote, was not exercising “highly consequential power beyond what Congress could reasonably be understood to have granted it” in its challenge against Kraken.
The judge ruled that Kraken’s “fair notice” defense is still admissible as the case goes forward, as Kraken “plausibly alleged” that the regulator failed to give it fair notice that it broke the law, which could violate Kraken’s right to due process.
“[T]o obtain judgment on Kraken’s fair notice and due process defenses, 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. It has not made such a showing,” Orrick wrote.
This case and several others filed by the SEC against crypto exchanges partially hinge on whether crypto should be considered an investment contract, and therefore subject to securities laws, under the Howey test.
The regulator remains in legal battles with Kraken, Coinbase, Consensys and others; but is in flux itself with the advent of the new presidential administration. Gary Gensler, who ran the SEC under former President Joe Biden, departed Jan. 20, and the commission is being led by Acting Chair Mark Uyeda until President Donald Trump’s appointee, Paul Atkins, receives Senate confirmation.
Uyeda launched a crypto task force last week, led by Commissioner Hester Peirce, aiming to develop a clear regulatory framework for crypto assets.
Uyeda and Peirce have both previously criticized the SEC’s crypto approach under Gensler. Atkins, for his part, was a crypto lobbyist before agreeing to join the SEC. He was previously an SEC commissioner under President George W. Bush.
A spokesperson for the SEC declined to comment on its ongoing case against Kraken. A spokesperson for Kraken did not respond to a request for comment.
