A federal judge in California indicated he is inclined to allow the U.S. Securities and Exchange Commission (SEC) lawsuit against Kraken to proceed, casting doubt on the exchange’s efforts to have the case dismissed, according to a report media reports.
According to The blockJudge William Orrick said that he “inclined to deny“Kraken’s request when it presented its oral argument for dismissal. The judge added that it was “plausible” that the digital assets offered on the platform “are offered and sold as investment contracts.”
Meanwhile, FOX Business reporter Eleanor Terrett reported that the judge agreed with the SEC’s arguments at the beginning of the hearing and after reading each party’s brief. She added that the lawyers she spoke to seemed to think the case would be discovered based on the June 20 proceedings.
However, Judge Orrick had not decided at the end of the hearing whether to grant dismissal and said he planned to review both sides’ arguments at the end of the hearing.
Kraken disputes the ‘ecosystem’ argument
The SEC’s “ecosystem” argument alleges that Kraken’s asset-specific web pages contain information promoting each asset, including details of issuers’ and promoters’ efforts to grow blockchain ecosystems in hopes of increasing asset prices .
Kraken’s attorney, Matthew Solomon, elaborated on the point, saying:
“Don’t be distracted by the fact that Kraken has summaries of what the issuers say on their website. They don’t promote anything.
They don’t promise anything.”
Solomon added that in addition to proving that an asset is a security, the SEC must also show that Kraken traded or settled the alleged security.
He said the SEC cannot prove the above point with its current argument because one cannot trade an “ecosystem,” “concept,” or “understanding.”
Kraken made similar arguments when it filed to deny its request in May.
Coinbase and Ripple briefcases
According to The Block, Soloman also compared the ongoing case to the SEC’s case against Coinbase, where the ecosystem concept originated. In that case, Judge Katherine Polk Failla ruled in March that the SEC had sufficiently argued that some crypto transactions on Coinbase’s platform could be considered investment contracts.
Matthew Soloman, representing Kraken, urged Judge Orrick to depart from Judge Failla’s reasoning. He criticized the concept of a “crypto ecosystem” used in the Coinbase ruling, which involved several stakeholders but excluded buyers and sellers. Soloman argued that this interpretation unfairly stretches the boundaries of the regulation.
Meanwhile, SEC attorney Peter Moores countered that the Howey test does not require a written contract and emphasized the importance of substance over form of transactions. He claimed that the framework used in the Coinbase decision was also appropriate for the Kraken case.
Kraken has also invoked the “big questions” doctrine, which requires clear congressional approval for regulatory actions with significant national impact. However, Judge Orrick seemed unconvinced by this argument, stating:
“I don’t think this is an important question. It is not a significant expansion of regulatory authority.”
Soloman urged Judge Orrick to consider the SEC’s case against Ripple — which found that the company’s programmatic XRP sales, including exchange sales, were not securities — to determine how to handle the selling crypto on the secondary market.
Soloman supported Judge Analisa Torres’ decision in the Ripple case, calling it:
“Very practical, very well-founded advice. And all it says is: look at the groups of transactions and the economic reality of those transactions.”
Applying the principle of “economic reality” to Kraken, Soloman said Kraken does not trade stocks investment contract, agreements, rights or obligations, but rather than ‘only trading a digital asset’.
Kraken emphasized that this is not enough to require registration with the SEC.