In a move signaling intensified regulatory oversight in the cryptocurrency arena, the Securities and Exchange Commission (SEC) has launched a lawsuit against Kraken, a well-known digital currency exchange. The suit alleges that Kraken operated as an unregistered securities business, marking the latest in a series of SEC actions targeting crypto trading platforms.
The charges against San Francisco-based Kraken underscore the growing regulatory scrutiny of the cryptocurrency industry. This action adds to the SEC’s recent crackdowns, including lawsuits against Binance, the largest global crypto exchange, and Coinbase, a significant US competitor.
This is not the first time Kraken has faced regulatory challenges. Previously, the exchange was accused of failing to register as a securities exchange, clearing agency, broker, or dealer since at least September 2018. Barely nine months after settling those charges, the SEC has filed new allegations against the company.
Central to the SEC’s complaint is the accusation that Kraken commingled its own funds with customer assets, using client money in bank accounts to cover operational expenses. An independent audit identified this practice as a significant risk to platform users. At certain points, Kraken reportedly held customer crypto assets valued at over $33 billion. We are curios if US banks commingle funds?
Gurbir Grewal, Director of the SEC’s Enforcement Division, criticized Kraken’s business practices, stating, “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.” He highlighted the resultant conflicts of interest and risk to investors’ funds, noting, “Kraken’s choice of unlawful profits over investor protection is a trend we see far too often in this space.”
Kraken disagrees, stating in their response:
“The SEC has promulgated no rule describing how an order in a digital asset should be matched, no guidance on how a trade should be cleared, and articulated no standards for how to broker a digital asset transaction. The allegation is hollow; there is no such thing as an exchange, broker dealer, or clearing agency for investment contracts. The SEC is demanding compliance with a regime that doesn’t exist.”
These latest charges occur in the wake of FTX’s collapse, another major player in the sector. The trial of FTX’s CEO, Sam Bankman-Fried, who was recently convicted of fraud, revealed similar issues of misusing customer assets.
Under the leadership of Chair Gary Gensler, the SEC has maintained that most crypto tokens are securities and that many crypto exchanges should be registered with the agency. The SEC’s complaint against Kraken points to “material errors” in the company’s 2020 and 2021 financial statements due to flawed record-keeping practices.
In response, Kraken has expressed disagreement with the SEC’s actions, emphasizing its stance that it does not list securities and intends to “vigorously defend our position.” The company further criticized the SEC for challenging crypto exchanges to register without clear legal guidance or a straightforward registration process, despite pushback from lawmakers.
The lawsuit also alleges that around $30.8 million and $33.6 million of customer custodial cash were in Kraken’s operational accounts in December 2020 and 2021, respectively.
In February, the company agreed to a $30 million settlement with the SEC and ceased its crypto staking program in the US to resolve separate charges.
The battle between regulatory oversight and industry innovation continues.