The U.S. Securities and Exchange Commission (SEC) has taken legal action against leading crypto exchange Kraken, alleging that it has violated federal securities laws. The SEC pointed out that Kraken, without registering in any capacity, has acted as a broker, dealer, exchange, and clearing agency concerning crypto asset securities. The case has been filed in the U.S. District Court for the Northern District of California.
The regulators argued that Kraken has created a risk for investors and has made significant earnings from fees and trading revenue without complying with U.S. securities laws designed to safeguard investors. The SEC’s suit also argues that the firm’s business practices, internal controls, and record keeping have subjected investors to additional risks that would be unacceptable for a correctly registered securities intermediary.
The SEC further accused Kraken of being deficient in preventing conflicts of interest and of commingling investors’ assets with its own. The regulator stated that these actions by Kraken illustrate why registration and the investor protections that accompany regulatory oversight are critical to the soundness of the United States capital markets.
The SEC’s complaint asserts that Kraken has at times held customer crypto assets valued at more than $33 billion and has commingled these crypto assets with its own, potentially putting its customers at a significant risk of loss. Kraken has also allegedly held more than $5 billion worth of its customers’ cash at times, and has partially commingled some of its customers’ cash with some of its own. The SEC also asserted that the exchange at times paid operational expenses directly from bank accounts that held customer cash.
Kraken’s parent entities, Payward Trading and Payward Ventures, have also been accused of failing to register their offer and sale of their crypto asset staking-as-a-service program. The SEC is therefore seeking a judgement that permanently restrains the defendants from violating securities laws and orders the disgorgement of ill-gotten gains. It also wants to stop the exchange from functioning as an unregistered exchange, broker, dealer, or clearing agency.
Reacting to these accusations, a Kraken spokesperson stated that the company disagrees with the SEC’s allegations and plans to vigorously defend itself in court. The spokesperson also expressed disappointment at the SEC’s continued regulation by enforcement approach, arguing that it harms American consumers, stifles innovation, and damages U.S. competitiveness globally.
Earlier this year, Kraken’s parent entities agreed to stop their crypto staking-as-a-service program and pay $30 million in disgorgement, prejudgment interest, and civil penalties. The SEC had then argued that when investors provide tokens to staking-as-a-service providers, they lose control of those tokens and take on risks associated with those platforms, with very little protection.