Kraken Win: Court Rejects SEC’s ‘Tokens are Securities’ Claim

• The court in the Kraken case rejected the SEC’s “tokens are securities” theory.
• The SEC’s “crypto asset security” concept was “unclear at best and confusing at worst.” 
• The agency’s regulation by enforcement strategy has blown apart, said Ripple legal chief.

A U.S. federal court dealt a blow to the SEC’s regulatory approach, when it ruled that digital assets traded on Kraken were not securities. This ruling not only impacts the SEC’s ongoing crackdown on crypto firms but also raises fundamental questions on the agency’s authority to classify tokens as securities.

The SEC’s broad assertion that “tokens are securities” has been facing increasing scrutiny over the years. And with the court finding this concept as “unclear” and “confusing,” echoing sentiments from the Ripple case, this is a massive win for Kraken and for the broader digital asset ecosystem.

It should be noted that the SEC initiated a massive crackdown on crypto firms in 2022 after collapse of the Terra ecosystem, claiming that virtual asset service providers are providing their services in the United States without registering their offerings as securities with the regulator.

However, the SEC cannot move forward in the case with its “tokens are securities” theory and will have to prove that for every alleged transaction on Kraken, that the Howey Test factors are satisfied. Notably, in a post on social media platform X (previously known as Twitter), the Chief Legal Officer at Ripple, Stuard Alderoty, said:

“Bad news for the SEC, whose entire regulation-by-enforcement strategy hinges on that failed premise.”

Alderoty added that this is another massive loss for the SEC, which also lost in a similar argument when Judge Analisa Torres ruled that XRP was not a security when sold to retail investors.

While the Kraken case will proceed to discovery, the onus is now on the SEC to prove that each transaction on the trading platform meets the Howey Test criteria for a security.