Kraken Charged by the SEC with Operating its Crypto Trading Platform in Violation of US Securities Law
Kraken advertises itself as “the crypto exchange for everyone” that allows customers to buy crypto with “peace of mind.” The company website boasts of a quarterly trading volume of $207 billion plus and more than 10 million clients in 190 countries.1 Kraken is reported to be the third-largest crypto exchange by spot-market trading volume.2
This past February Kraken agreed to pay a $30 million U.S. Securities and Exchange Commission (SEC) fine and cease its crypto-staking business in the United States. On November 20, the SEC again charged Kraken, this time with “operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer and clearing agency”3 which is a violation of U.S. securities laws designed to protect investors.
Earlier this year the SEC had also filed similar lawsuits against the Coinbase and Binance crypto exchanges.
The SEC claims in the November filing that Kraken has made available to customers crypto assets that are offered and sold as investment contracts, and thus, are actually securities. The SEC complaint details the crypto assets offered and sold on the Kraken Trading Platform or through Kraken Services which the SEC believes to be securities including those trading under the symbols ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND and SOL.4 These crypto asset securities have been named in one or more SEC actions against other unregistered intermediaries.
Challenging Kraken’s claim of customers being able to buy crypto with “peace of mind,” the SEC further alleged in the complaint that Kraken’s business practices put investors at risk. “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,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement.
“That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk.”5
The SEC’s complaint cited deficient internal controls and poor recordkeeping practices as well alleging Kraken commingled customer assets with Kraken’s assets. This fund comingling was uncovered by an independent auditor hired by the SEC who found “a significant risk of loss” for Kraken’s customers.6 This comingling of funds is particularly concerning, as it was the basis of the Department of Justice criminal case against FTX founder Sam Bankman-Fried. FTX, a competitor of Kraken, declared bankruptcy in 2022.
The SEC complaint alleges that Kraken has held customer crypto assets valued at more than $33 billion, and comingled these crypto assets with its own and has held more than $5 billion worth of customers’ cash, some of which it has also comingled with its own. The SEC complaint also alleges that at times Kraken paid operational expenses directly from bank accounts that hold customer cash.
The SEC complaint seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest and penalties.
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1 Kracken Crypto Exchange Website
Link: https://www.kraken.com/
2, 6 SEC Alleges in New Lawsuit that Kraken Failed to Register and Commingled Customers’ Funds by Leo Schwartz, 11/20/2023
Link: https://fortune.com/crypto/2023/11/20/sec-kraken-commingle-crypto-assets-fiat-lawsuit-exchange/
3, 5 SEC Charges Kraken for Operating as an Unregistered Securities Exchange, Broker, Dealer and Clearing Agency, 11/20/2023
Link: https://www.sec.gov/news/press-release/2023-237
4 SEC Complaint
Link: https://www.sec.gov/files/litigation/complaints/2023/comp-pr2023-237.pdf