Kraken failed to dismiss the SEC’s unregistered-exchange case

U.S. District Judge William H. Orrick denied Kraken’s motion to dismiss the Securities and Exchange Commission’s lawsuit on August 23, 2024, allowing the agency’s unregistered-exchange, broker, dealer and clearing-agency claims to proceed in the Northern District of California.

The ruling mattered because it kept a major U.S. trading platform inside the SEC’s enforcement campaign over secondary-market crypto transactions. It did not decide that Kraken had violated the law, and it did not hold that the tokens named by the agency were inherently securities. At the pleading stage, the court decided only that the SEC had stated a plausible case that at least some transactions facilitated by Kraken could be investment contracts.

What the court allowed to proceed

The SEC sued Payward, Inc. and Payward Ventures, Inc., which do business as Kraken, on November 20, 2023. The agency alleged that Kraken had operated without the registrations required for securities exchanges, brokers, dealers and clearing agencies. Kraken argued that transactions on its platform did not involve securities and fell outside the SEC’s authority.

Orrick applied the Howey framework, which the Ninth Circuit summarized as requiring an investment of money in a common enterprise with an expectation of profits produced by the efforts of others. The judge concluded that the SEC had plausibly alleged each element for transactions involving the assets identified in its complaint. He also rejected the proposition that a formal contract or continuing post-sale obligation between a token issuer and a buyer was required.

Secondary trading was central. The order said the Howey analysis still applies when a purchaser buys from another holder through an exchange rather than directly from an issuer. That conclusion did not make every exchange trade a securities transaction. It meant the economic reality and surrounding circumstances of the particular transaction remained the relevant inquiry.

The order drew an important token-transaction boundary

The court separated a crypto asset from the arrangement in which it is sold. Orrick criticized the SEC’s “crypto asset securities” label as unclear and potentially confusing, and he did not understand the complaint to allege that individual tokens were themselves securities. Instead, the surviving theory was that assets could be offered or sold as part of investment contracts.

That distinction was substantive, not cosmetic. A token could exist and trade without carrying a permanent legal classification into every later transfer, while a specific sale could still satisfy Howey because of the promises, promotion and economic expectations surrounding it. The order said whether the SEC could prove its allegations would be determined after discovery.

The ruling therefore gave neither side the broad declaration it wanted. The SEC preserved its case against Kraken’s platform activities. Kraken preserved the ability to challenge the evidence and could point to the court’s rejection of any theory that treated the tokens themselves as investment contracts.

A threshold challenge to SEC authority failed

Kraken also invoked the major questions doctrine, arguing that the SEC was claiming regulatory power that required clearer authorization from Congress. Orrick rejected that defense. He reasoned that applying established securities-law principles to cryptocurrency was not the kind of extraordinary expansion of agency power that triggered the doctrine.

The court distinguished the SEC’s pleading from the thinner allegations another federal judge had recently rejected concerning some secondary sales on Binance. In Orrick’s assessment, the Kraken complaint contained more detailed allegations about how the relevant assets were promoted and sold. That comparison reinforced a case-specific point: survival depended on the allegations pleaded, not a universal judgment covering all crypto trading.

The August 23 order required Kraken to answer the complaint and set an October 15, 2024 case-management conference, with a joint statement due October 8. Those procedural steps were the verified consequence on August 23. Liability, remedies and the ultimate status of the challenged transactions remained unresolved.