SEC releases the Kraken on US crypto exchange

21 Nov 2023

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Kraken, which has been dealing in crypto since 2018, called the SEC charge ‘incorrect as a matter of law, false as a matter of fact and disastrous as a matter of policy’.

Kraken, one of the world’s biggest crypto exchanges, has been charged by the US Securities and Exchange Commission (SEC) for allegedly operating as an unregistered securities business.

This marks the latest in a series of crackdowns by the SEC on crypto trading platforms based in the US. The argument is that digital assets are subject to US securities laws because they are investment contracts.

According to the SEC complaint, Kraken has made “hundreds of millions of dollars” by “unlawfully” facilitating the buying and selling of crypto asset securities since September 2018.

“Kraken intertwines the traditional services of an exchange, broker, dealer and clearing agency without having registered any of those functions with the commission as required by law,” an SEC statement reads.

“Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements and safeguards against conflicts of interest, among others.”

Kraken was quick to respond. The formerly San Francisco-headquartered crypto exchange noted in a blogpost that the SEC complaint alleges “no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty”.

“It includes big dollar amounts but does not allege a single one of those dollars is missing or misused – no Ponzi scheme, no failure to maintain adequate reserves and no failure to preserve the identity of client funds 1:1. Indeed, none of these things would be true,” the blog reads.

Instead, Kraken pointed out, the SEC complaint makes the technical argument that the crypto exchange’s business requires special securities licences to operate because the digital assets its deals in are what the SEC calls investment contracts.

“This is incorrect as a matter of law, false as a matter of fact and disastrous as a matter of policy,” Kraken claimed.

Filed in a federal district court in California yesterday (20 November), the SEC lawsuit also alleges that Kraken’s “business practices, deficient internal controls and poor record-keeping practices” present a range of risks for its customers.

“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 division of enforcement.

“That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk. Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space.”

Earlier this year, the SEC sued both Coinbase and Binance, claiming the crypto exchanges had acted unlawfully in the country. SEC chair Gary Gensler also claimed that Binance and its CEO engaged in “an extensive web of deception”.

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Vish Gain is a journalist with Silicon Republic