In a recent development, the Securities and Exchange Commission (SEC) has once again taken legal action against cryptocurrency exchange Kraken. About six months after the SEC reached a $30 million settlement with Kraken over penalties related to the exchange's staking services, a new lawsuit has been filed. The regulator alleges that Payward Inc., the parent company of Kraken, operated an unregistered securities exchange.
The Securities and Exchange Commission (SEC) has once again filed a lawsuit against cryptocurrency exchange Kraken. According to the SEC's complaint, Kraken has made hundreds of millions of dollars since September 2018 by illegally facilitating cryptocurrency transactions. The regulator also asserts that the company provided traditional exchange, broker, dealer and clearing house services without completing the required registration with the Commission.
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Violation of securities laws
The SEC argues that Kraken's unregistered trading services deprived investors of important protections, including regulatory oversight, recordkeeping requirements, and safeguards against conflicts of interest. Kraken's alleged violations are summarised below:
- Kraken provides a marketplace that matches the securities orders from multiple buyers and sellers, thereby acting as an exchange.
- As a broker, Kraken executes securities transactions for customer accounts.
- Kraken buys and sells securities for its own purposes without an applicable exemption, acting as a dealer.
- Kraken acts as an intermediary in the settlement of crypto-securities transactions by customers, functioning as a clearing house.
The lawsuit is again based on the SEC's core belief that almost all cryptocurrencies should be classified as unregistered securities. The same allegations have been made against rival Coinbase. Coinbase prepared for a legal battle and Kraken is expected to follow a similar path, according to a blog post.
"Today, the SEC filed a complaint alleging that Kraken operates as an unregistered securities exchange, broker, and clearing house. We disagree, and intend to vigorously defend our position in court. Today’s news has no impact on the products we offer and we will continue to provide services to our clients without interruption. We remain fully committed to our U.S. and global clients and partners." - Kraken Statement
Mixed customer funds?
The SEC's filing further asserts that Kraken's operational methods, insufficient internal controls, and substandard record-keeping expose customers to potential risks. The SEC alleges that Kraken mixed customer funds with its own, including using funds from accounts holding customer funds to pay operating expenses. Other claims are that Kraken mixed customer crypto assets with its own. The SEC is seeking injunctions, disgorgement of ill-gotten gains plus interest, and financial penalties.
Kraken has responded to the commingling allegations by stating that the SEC cannot prove missing customer funds or predict a loss to customers. Kraken contends that the complaint acknowledges that the alleged commingling is essentially the issuance of fees earned by Kraken. Moreover, Kraken underscores the challenges of registering with the SEC as a crypto exchange. This is highlighted by the lack of rules on how crypto orders should be matched, guidance on trade settlement procedures and standards for the mediation of crypto transactions.
