SEC goes after Kraken - The details
TLDR The US SEC is suing Kraken Crypto for operating as an unregistered securities exchange, broker, dealer, and clearing agency.
The SEC has sued the digital asset providers Coinbase and Binance for similar alleged failures, which both firms deny.
Kraken plans to fight back, claiming that Congress should decide how cryptocurrency exchanges should be regulated and that the SEC’s view of digital assets is “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”
The United States SEC has taken its court games to the Kraken crypto exchange. On Monday, the US Securities and Exchange Commission sued Kraken, one of the world’s largest crypto exchanges, accusing it of illegally operating as a securities exchange without first registering with the regulator.
The action, filed in federal court in San Francisco, is the latest step in SEC Chair Gary Gensler’s effort to bring crypto under his agency’s jurisdiction, arguing that digital assets are investment contracts subject to federal securities laws.
The SEC, led by Chairman Gary Gensler, claims that crypto exchanges and many digital tokens are subject to its jurisdiction. The vulnerabilities highlighted by the bankruptcy of Sam Bankman-Fried’s FTX exchange prompted the agency to launch multiple enforcement actions against sector participants.
Gensler has consistently said that cryptocurrency is riddled with fraud and inappropriate conduct. In the Kraken case, the regulator identifies a number of tokens and contends that they are securities, as it did in the Coinbase and Binance complaints. The SEC states that:
Since at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities […] Without registering with the SEC in any capacity, Kraken has simultaneously acted as a broker, dealer, exchange, and clearing agency with respect to these crypto asset securities. SEC
In addition, the Securities and Exchange Commission is endeavoring to levie the following charges against the crypto exchange:
1. Provides a marketplace where the orders for securities from multiple buyers and sellers are consolidated through the use of established, non-discretionary procedures; functions as an exchange;
2. Conducting securities transactions on behalf of Kraken customers, thereby functioning as a broker.
3. Buying and selling securities for its own account, excluding applicable exceptions, and functioning as a dealer.
4. Intermediary in facilitating settlements of crypto asset securities transactions by Kraken customers, functioning as a securities depository and functioning as a clearing agency.
Furthermore, the SEC said that the exchange’s business practices and “deficient” internal controls caused the exchange to mix up to $33 billion in customer assets with its own. According to the SEC, this resulted in a “significant risk of loss” for its clients.
Furthermore, the SEC claims in the lawsuit that the crypto exchange puts its clients’ personal and financial information in danger due to its business practices and “poor recordkeeping.”
Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash […] Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers. SEC
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, also issued a statement regarding the SEC’s decision to sue the crypto exchange:
We allege that Kraken made a business decision to reap hundreds of millions of dollars from investors rather than coming into compliance with the securities laws. That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk. Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space, and today, we’re both holding Kraken accountable for its misconduct and sending a message to others to come into compliance. Gurbir S. Grewal, director of SEC’s Division of Enforcement
Kraken’s way forward
The crypto exchange committed earlier this year to stop marketing or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million.
Kraken stated in a post on X, formerly known as Twitter that it disagreed with the SEC’s assertions and vowed to “vigorously defend” its position.
Today, the SEC filed a complaint alleging that Kraken operates as an unregistered national securities exchange, broker, and clearing house. We disagree with their claims and plan to vigorously defend our position. https://t.co/a0C4wzBo3f — Kraken Exchange (@krakenfx) November 21, 2023
According to the exchange, the current changes have no impact on its product offering, and the company would “continue to provide services to our clients without interruption.”
Kraken plans to fight back, claiming that Congress should decide how cryptocurrency exchanges should be regulated and that the SEC’s view of digital assets is “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”
Kraken was formed in 2011. Investors include Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge, and Tribe Capital.
The case is SEC v Payward Inc et al, U.S. District Court, Northern District of California, No. 23-06003.