Kraken, a leading global digital asset exchange, is embroiled in yet another legal battle as the United States Securities and Exchange Commission (SEC) filed a lawsuit in San Francisco federal court.
In the latest Kraken SEC case, the watchdog, under the leadership of Chair Gary Gensler, contends that Kraken has been operating as a securities exchange without proper registration, aiming to assert regulatory control over the digital asset sphere. The press release reads:
“The SEC alleges that Kraken 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.”
This is not the first enforcement action Kraken has faced. In February this year, the exchange paid a $30 million in penalties after the SEC sued it for “unlawful offer and sale of securities” under its staking program.
Kraken’s Response
In response, Kraken disagrees with the SEC and argues that the regulation of digital asset exchanges should be determined by the Congress. The exchange vehemently rejects the SEC’s perspective on digital assets, labeling it as legally incorrect, factually false, and detrimental as a matter of policy. Moreover, Kraken assures its 10 million clients that the lawsuit will not impact them. It stated:
“The SEC has repeatedly challenged crypto exchanges to come in and register without a single law supporting their position and no clear path to registration. And despite opposition from lawmakers, the SEC continues to pursue legal action against these crypto exchanges.”
This legal action follows similar lawsuits filed by the SEC against other major exchanges, including Binance and Coinbase. The SEC alleges that Kraken, operating as Payward Inc. and Payward Ventures Inc. since 2018, earned hundreds of millions of dollars while neglecting securities laws intended to protect investors.
Kraken SEC Lawsuit: The Allegations
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated:
“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.”
The regulator accused Kraken of risky business practices, including deficient internal controls and poor recordkeeping. It believes that the exchange commingles its users’ money with its own and pays operational expenses directly from accounts that hold user cash. The SEC claims that Kraken’s failure to register, has created a business model fraught with conflicts of interest, jeopardizing investor funds.
Kraken declined any use of user funds and stated that it has only spent from its own earned fees. The SEC also accused Binance of similar conduct, alleging the commingling of customer funds, a claim Binance denies.
More on Kraken
Founded in 2011, Kraken boasts backing from prominent investors, including Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge, and Tribe Capital. This legal dispute underscores the increasing regulatory scrutiny faced by the exchanges and the ongoing efforts by regulatory bodies to establish control and oversight in the rapidly evolving digital asset landscape.
Related reading: Regulatory “Siege” Underway For U.S. Exchanges — Warns Ex-SEC Official
The lawsuit alleges that the exchange violated the registration provisions of the Securities Exchange Act of 1934. The complaint seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and a civil fine.
