In a lawsuit filed Monday, the SEC alleged that Kraken, currently the third-largest cryptocurrency exchange by trading volume on the spot market, failed to register its services with the agency in violation of U.S. securities law.
The lawsuit comes less than a year after the SEC settled with Kraken over its cryptocurrency business, with the exchange agreeing to pay a $30 million fine and terminate operations in the US. The initial complaint sparked industry opposition, with Coinbase CEO and co-founder Brian Armstrong tweeting that “regulation by enforcement” is not working.
“We allege that Kraken made a business decision to make hundreds of millions of dollars from investors rather than comply with securities laws,” Gurbir S. Grewal, director of the SEC’s Enforcement Division, said in a statement. “Kraken choosing illegal profits over protecting investors is something we see all too often in this space, and today we are holding Kraken accountable for its misconduct and sending a message to others to comply.”
“We disagree with the SEC’s complaint against Kraken, stand firm in our view that we do not list securities and plan to vigorously defend our position,” a Kraken spokesperson said in a statement shared with. luck. “It is disappointing to see the SEC continue down a path of regulation through enforcement, which harms American consumers, hinders innovation, and harms U.S. competitiveness globally.”
‘full of conflict of interest’
In a reversal of lawsuits filed earlier this year against cryptocurrency exchanges Coinbase and Binance, the SEC alleges that Kraken operates in the same way as a traditional financial company — as a securities exchange, broker, dealer, and clearing agency — but without registering with agency.
Similar to other complaints, the SEC claims that a number of cryptocurrencies are securities and therefore subject to its jurisdiction, including Solana, the Polygon blockchain’s MATIC, and the Cardano blockchain’s ADA.
The SEC also alleges that Kraken commingled customer funds with its own. In the complaint, the agency cites a report from an independent auditor hired by the exchange that found a “substantial risk of loss” for Kraken customers. The SEC also cites Kraken’s own terms of service, which state that Payward – its parent company – provides “no assurance” that customers’ crypto assets “are held in [the customer] Free and clear of any security interest or other liens or encumbrances on the part of Payward or others.
Commingling client assets is a serious allegation given the practices of Kraken’s former competitor FTX, which collapsed last November. As stated in the criminal case against FTX founder Sam Bankman Fried by the Department of Justice, FTX merged client assets with its trading company Alameda Research, using the funds for its own purposes.
In its complaint against Kraken, the SEC does not allege that the company misallocated clients’ assets, but that failure to comply with securities law “resulted in a business model rife with conflicts of interest that put investors’ money at risk,” Grewal said.