SEC Accuses Kraken of Operating Without Registration, Alleges Mixing of Funds
Zach Anderson Nov 22, 2023 10:16
The SEC has accused Kraken of operating as an unregistered securities exchange, broker, dealer, and clearing agency, accusing it of commingling customer and company funds and deficient internal controls.
The U.S. Securities and Exchange Commission (SEC) has filed a complaint against Payward Inc. and Payward Ventures Inc., collectively known as Kraken, for operating their cryptocurrency trading platform without the necessary registrations. The complaint, filed in San Francisco, alleges violations dating back to September 2018. Kraken is accused of functioning as an unregistered exchange, broker, dealer, and clearing agency, amalgamating the roles of these entities without proper registration. This reportedly deprived investors of crucial protections, such as SEC inspection and safeguards against conflicts of interest.
The SEC's complaint outlines several concerns, including Kraken’s provision of a marketplace for securities transactions, effectively operating as an exchange; engaging in securities transactions for customers, thus acting as a broker; buying and selling securities for its own account, functioning as a dealer; and serving as an intermediary in settling transactions in crypto asset securities, thereby operating as a clearing agency. The complaint also alleges that Kraken's business practices, including deficient internal controls and poor recordkeeping, pose risks to customers. Notably, Kraken is accused of commingling customer funds with its own, leading to potential loss risks.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the agency's stance on Kraken's preference for profits over investor protection. The SEC seeks injunctive relief, disgorgement of profits plus interest, and penalties. Earlier in February, Kraken agreed to a $30 million penalty and ceased offering crypto asset staking services.
This lawsuit is part of a wider SEC crackdown on cryptocurrency exchanges operating without proper registrations. Similar allegations were made against other exchanges like Binance and Coinbase. The SEC's list of unregistered securities includes tokens like ALGO, MATIC, and NEAR. Kraken's response, as expressed by CEO Dave Ripley, disputes the SEC's claims and defends their position of not listing securities. The debate continues over the SEC's approach to cryptocurrency exchanges and the absence of clear regulatory pathways.
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