Judge Leaning Towards Denying Kraken’s Motion to Dismiss SEC Case

Kraken and the SEC recently presented their arguments about the classification of digital assets on Kraken as securities, however, the judge suggested he might deny Kraken's motion to dismiss the case. Meanwhile, Ripple's CEO faces a jury trial for misleading statements about XRP, although the judge presiding over the case dismissed some claims. Additionally, Binance was fined in India for AML violations while Worldcoin's investigation in Kenya was dropped.

SEC vs Kraken

Lawyers representing Kraken and the United States Securities and Exchange Commission (SEC) presented their arguments to a federal judge about the classification of digital assets on the exchange as securities. During a Jun. 20 hearing in the U.S. District Court for the Northern District of California, Kraken's lawyer, Matthew Solomon, and SEC counsel, Peter Moores, appeared before Judge William Orrick to discuss a motion to dismiss a lawsuit that was filed by Kraken in February. The judge indicated he was "inclined to deny" the motion, and also suggested it was "plausible" that digital assets were offered and sold as investment contracts on Kraken.

Solomon argued that there were a lot of differences between Kraken's case and previous cases involving the SEC and firms like Terraform Labs and Telegram. He referenced Judge Analisa Torres' decision in the SEC’s case against Ripple Labs, where XRP was deemed a security when sold to institutional investors, but pointed out that the closest comparable case to Kraken’s was Coinbase’s. 

The SEC, however, argued that Kraken functioned more as an “ecosystem” where tokens were sold as investment contracts, which fits the definition of securities under the Howey test. Kraken’s legal team does not agree with these theories, and wants the SEC to prove that the securities were brokered, traded, or cleared on Kraken.

Judge Orrick did not issue a ruling on the motion to dismiss but indicated that he was still leaning towards denying it. He also mentioned that a year would be sufficient for discovery if the case proceeds. 

The SEC started its enforcement action against Kraken in November of 2023, after a settlement in February 2023, where Kraken agreed to pay $30 million and stop offering staking services to U.S. clients.

Although Ethereum (ETH) was not explicitly mentioned in the SEC v. Kraken case, it has been a focal point in some other legal battles between crypto firms and the SEC. In March, there were reports that suggested the SEC was considering labeling ETH as a security. However, Consensys recently announced that the SEC plans to drop its investigation into whether ETH could be considered a security.

Ripple’s CEO to Face Jury for Misleading Claims

It is not just Kraken that currently finds itself in some legal hot water. A United States federal court judge has allowed a civil securities lawsuit against Ripple Labs to proceed, and denied the company's request for summary judgment. 

The lawsuit alleges that Ripple CEO Brad Garlinghouse violated California securities laws by making misleading statements. California District Court Judge Phyllis Hamilton's Jun. 20 order will send the case to a jury, which will determine if Garlinghouse made false claims in a 2017 interview where he stated he was "very, very long" on XRP. 

According to the lawsuit, this was misleading as Garlinghouse ended up selling millions of XRP that year. Judge Hamilton dismissed four allegations related to Ripple's failure to register XRP as a security but upheld the misleading statements claim, and stated that XRP could be considered a security when sold to non-institutional investors who expected profits from Ripple.

Ripple argued against the misleading statement claim by pointing out that XRP is not a security under the Howey test. Judge Hamilton disagreed, and stated that non-institutional investors might have expected profits from Ripple's activities, meeting a key criterion of the Howey test.

Judge Hamilton's decision contradicts with a July 2023 ruling by Judge Analisa Torres in a SEC lawsuit against Ripple, which found that XRP was not a security when sold to institutional investors. Despite the initial optimism in the U.S. crypto industry that Judge Torres' ruling would set a precedent, its impact has unfortunately been quite limited. In fact, Judge Jed Rakoff rejected a similar argument in the SEC's lawsuit against Terraform Labs, which resulted in a $4.5 billion settlement with the SEC.

Binance Fined for AML Violations in India

Meanwhile, India’s Financial Intelligence Unit (FIU) has fined crypto exchange Binance 188.2 million rupees ($2.25 million) for providing services to Indian clients without complying with the country's Anti-Money Laundering (AML) rules. The fine was announced on Jun. 19, and is based on multiple violations of the Prevention of Money Laundering Act (PMLA), 2002.

Binance, which operates as a Virtual Digital Asset Service Provider, is required to maintain and report transaction records and ensure robust AML measures under Section 2 (as) (vi) of the PMLA. However, FIU's investigation found that Binance did not meet these obligations.

In January 2024, Indian authorities issued show-cause notices to Binance and other offshore crypto exchanges, and banned them from India for operating illegally. Despite this, Binance and KuCoin were approved by the Financial Intelligence Unit in May on the condition that they pay a penalty after a hearing with the FIU. 

The FIU’s fine on Binance was based on evidence showing multiple contraventions, including failing to maintain and report transaction records, not providing required information to authorities, and not preserving records as mandated.

This is not the first regulatory action against Binance. In May, Canada's Financial Transactions and Reports Analysis Centre (FINTRAC) imposed a $4.4 million penalty on Binance for failing to register and report large transactions in digital assets. Binance appealed against these allegations of noncompliance with AML and Countering the Financing of Terrorism regulations. Additionally, in February, Nigerian authorities detained two Binance executives over allegations of tax evasion and money laundering.

Worldcoin Cleared in Kenya

While other crypto projects are being scrutinized by the law, Worldcoin is off the hook in Kenya. Worldcoin is a cryptocurrency and digital identity project that was co-founded by OpenAI CEO Sam Altman.

It was recently able to secure a major win in Kenya after a suspension order in 2023. The Directorate of Criminal Investigations (DCI) of the National Police Service announced on Jun. 14, 2024, that the investigation into Worldcoin is being dropped. The decision came after a request from Worldcoin's lawyers about the status of the investigation filed in May 2024. The DCI's statement confirmed that Kenya’s public prosecution unit agreed to close the case without any further police action.

The DCI investigated a number of allegations against Worldcoin's activities in Kenya during 2022 and 2023, and focused mainly on the alleged unlawful collection and transfer of personal sensitive data. After the conclusion of the investigation, the Kenyan police recommended that Worldcoin make sure that it is properly registered in the country, and that it gets the necessary licenses with the coordination of the Data Protection Commission and the Communication Authority of Kenya.

Thomas Scott, chief legal officer at Worldcoin developer Tools for Humanity, is grateful for the fair investigation and the decision to close the matter. Worldcoin is also still committed to continue working with the Kenyan government and hopes to resume World ID registration across the country soon. 

Worldcoin was officially launched in July of 2023 after three years of development, and plans to differentiate humans from artificial intelligence by scanning a person's iris and issuing a World ID to prove their human identity online.

The project faced quite a lot of regulatory concerns globally because of privacy and data protection issues. In Kenya, Worldcoin was banned a few weeks after its launch, with the local government halting all related activities, including biometric identification. 

Other countries, including India, South Korea, Germany, Brazil, and Hong Kong, have also investigated Worldcoin's data collection practices, and Hong Kong ordered it to stop operations in May 2024 over privacy violations.

Despite these challenges, Worldcoin has still seen growth. By April 2024, the World App had 10 million registered users, with an average of 2 million daily users and over 5 million monthly active users.