- The SEC has sued Kraken, alleging it operated as an unregistered securities business
- Kraken has denied the charges and intends to defend itself
- The SEC’s lawsuit marks its first significant move since its defeat to Ripple
The Securities and Exchange Commission (SEC) has filed a lawsuit against crypto exchange Kraken, accusing it of operating as an unregistered securities business. The charges, extending back to at least September 2018, add Kraken to a list of regulatory actions targeting prominent crypto exchanges like Binance and Coinbase. Kraken has denied the charges and says it plans to “vigorously defend our position.” The lawsuit is the first major move by the SEC since its defeat to Ripple over the interpretation of cryptocurrencies as securities.
Kraken Accused of Commingling and Selling Securities
The SEC’s charges see Kraken face allegations of failing to register as a securities exchange, clearing agency, broker, and dealer. The agency contends that Kraken mingled its funds with customers’, occasionally using users’ cash from bank accounts to cover operational expenses. The civil complaint reveals the exchange’s auditor flagged this commingling practice as a “significant risk of loss” for customers, with customer crypto assets held at times exceeding $33 billion.
The SEC asserts that Kraken prioritized unlawful profits over investor protection, highlighting a business model rife with conflicts of interest. The regulator’s accusations echo concerns raised about FTX, whose collapse last year exposed customer asset sharing with affiliated firms and led to FTX’s CEO, Sam Bankman-Fried, being convicted on fraud charged earlier this month.
Under Chair Gary Gensler, the SEC has forced through its mantra that most crypto tokens are securities, despite the XRP ruling, requiring many exchanges to register with it. At the same time, it has made registration next to impossible for those that try.
Exchange Disputes Claims
Kraken disputes the SEC’s complaint, emphasizing its disagreement with the agency’s position on crypto exchange registration, stating that it intends to fight:
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. 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.
In February, Kraken agreed to pay $30 million and cease its US crypto staking program to settle separate charges brought by the SEC, something that co-founder Jesse Powell pointed out:
Message is clear: $30m buys you about 10 months before the SEC comes around to extort you again. Lawyers can do a lot with $30m but the SEC knows that a real fight will likely cost $100m+, and valuable time. If you can’t afford it, get your crypto company out of the US warzone.
— Jesse Powell (@jespow) November 21, 2023
No doubt we can soon expect a robust response from Kraken to the charges and another legal battle ahead for the SEC.
