Kraken’s ‘major questions doctrine’ defense in the US SEC lawsuit crumbles

A California federal judge cut down part of Kraken’s three defenses in the exchange’s ongoing lawsuit against the U.S. SEC. Kraken cited the “major questions doctrine” that prohibited government agencies from exercising powers not specifically delegated by the U.S. Congress.

The ruling disclosed that Judge William Orrick had partially thrown out Kraken’s defense, securing a small win for the U.S. SEC. The California federal judge said that the agency was not asserting a highly consequential power beyond what Congress could reasonably be understood to have granted it. 

Binance, Coinbase, and Ripple also cited the major questions doctrine in their defenses against the U.S. SEC, arguing that Congress had not given the regulator authority over crypto.

The agency had petitioned the court to throw out the Kraken defense in a case where it accused the exchange of offering unregistered securities. The crypto exchange had raised 18 affirmative defenses – including the three ruled on by Judge Orrick – in answers to the U.S. SEC’s complaint.

Judge says the U.S. SEC acted within Congress-granted mandate

Judge Orrick axed part of Kraken’s defenses in a January 24 order, saying that the U.S. SEC had not overstepped its Congress-specified mandate.

Kraken admitted that it never registered with the U.S. SEC, arguing that it was not required to do so since the transactions it enabled on its platform did not involve securities and did not fall under the agency’s “regulatory purview.” 

Out of Kraken’s 18 affirmative defenses, the U.S. SEC moved for judgment on three of them, including the “major questions doctrine,” “due process,” and “fair notice.” 

“I have already determined that the major questions doctrine is not implicated in this case, at least under the current facts, and GRANT the motion to dismiss it.”

-Judge William Orrick

He, however, said the crypto exchange was entitled to proceed with the other two defenses, which were “plausibly alleged.” Judge Orrick also added that cases implicating the major questions doctrine had the potential to impose significant influence on the U.S. economy. 

According to the California federal judge, crypto is a growing “financial instrument” that has not risen to a level of economic import that is reasonably comparable to the American energy market or billions of dollars of outstanding student debt. Judge Orrick said the U.S. SEC would have to show that any ordinary entity in Kraken’s position understood that the Howey Test – as applied to the secondary market transactions on its platform – established those transactions as investment contracts.

Crypto community receives court ruling with mixed reactions

Stuart Alderoty, Ripple’s chief legal officer, said some U.S. SEC lawyers in the Kraken case were still playing old games, earning yet another “admonishment” from a federal judge. Moreover, while one crypto enthusiast urged Kraken to continue fighting, a crypto analyst pointed out the battle for regulatory clarity was far from over. 

Himanshu Sirohi, a crypto commentator, claimed that Kraken could be forced to discontinue offering certain crypto services in the U.S. or pay heavy fines if it loses the case. He added the outcome of the U.S. SEC vs Kraken might also lead to stricter rules for exchanges, making it even more difficult to operate. Sirohi claimed that Kraken’s loss could also scare off smaller crypto companies that may fear facing similar legal actions. 

According to Sirohi, this case’s outcome could set a precedent for how the U.S. will regulate crypto in the future.

If the court agrees with the U.S. SEC, it will give the agency more control over Kraken and the entire crypto industry. Kraken and other crypto companies will either have to change how they work or shut down.

Cryptopolitan Academy: Are You Making These Web3 Resume Mistakes? - Find Out Here