The U.S. Securities and Exchange Commission (SEC) filed charges against Kraken, one of the world’s largest cryptocurrency exchanges, on Nov. 20, accusing it of failing to register with the SEC as an exchange, clearing agency, or broker. It alleges the San Francisco-based company—which was founded in 2011 and has more than 10 million clients—operated its crypto trading platform as an “unregistered securities exchange, broker, dealer, and clearing agency.” Specifically, the company violated the registration provisions of the Securities Exchange Act of 1934, the agency said. According to the SEC’s complaint, since at least September 2018, Kraken has “made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities.” The company “intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law,” the SEC said. Owing to Kraken’s alleged failure to register these functions, investors have been deprived of significant protections, such as inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others, the SEC said. Additionally, the SEC’s complaint alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices presented a range of risks to customers too. According to the complaint, Kraken “commingles its customers’ money with its own,” including paying “operational expenses directly from accounts that hold customer cash,” which the SEC said presented a significant risk of loss to its customers. 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. Monday’s lawsuit seeks a civil fine, disgorgement of ill-gotten gains, and for Kraken to cease acting as an exchange without registering. Kraken is backed by investors including Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge, and Tribe Capital. “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,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement Monday. “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,” Mr. Grewal added. Mr. Ripley said the company plans to “vigorously defend our position.” “As we have seen before, the SEC argues that @krakenfx should ‘come in and register’ with the agency when there is no clear path to registration,” he wrote. “Its allegations are factually incorrect, contrary to law, and the wrong way to create policy in the United States. As an industry leader, we will stand up to these allegations and defend the crypto industry’s right to exist in the U.S.” The CEO added that Kraken believes congressional action is the most “appropriate path to resolving the lack of regulatory clarity in the U.S.” and will “continue to support these efforts to bring clarity and certainty to the chaotic environment that has been created in the U.S.” Monday’s lawsuit is similar to suits filed by the SEC against exchanges Coinbase and Binance in June. Both are defending against the regulator’s claims.
SEC Sues Kraken, Alleges Crypto Platform Operated Unregistered Exchange
