Kraken Faces SEC Charges for Unlawful Crypto Trading Operations

The U.S. Securities and Exchange Commission (SEC) has added Kraken – a San-Francisco-based crypto exchange – to its hitlist of industry giants charged with a litany of securities law violations and internal control failures.

In a lawsuit filed in a San Francisco court on Monday, the regulator claimed Kraken failed to register as a securities exchange, broker, dealer, and clearing agency, despite intertwining all such services for customers on its trading platform.

“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,” wrote the SEC in an accompanying press release.

The SEC’s allegations echo those placed against Coinbase and Binance in June, who were also accused of operating unregistered securities exchange by listing numerous “crypto asset securities” on their platforms.

The agency rebuked Kraken for listing many of the same tokens including ADA, SOL, and MATIC, alongside some unique names including ALOG, MANA, and OMG. It provided full arguments for how such tokens were sold as part of investment contracts on a case-by-case basis.

It also called out Kraken for its poor recordkeeping practices: the company has allegedly commingled funds from its customers with those from its corporate accounts and has paid operational expenses from accounts holding customer money.

For instance, as of December 31, 2021, Kraken’s independent auditor said it held over $33 million of customer funds in corporate accounts.

Kraken’s Response to SEC Lawsuit

Like its formerly accused rivals, Kraken has dismissed the SEC’s accusations as having no basis in the law, and criticized the agency for providing “no clear path to registration” for crypto firms.

“We disagree with their claims and plan to vigorously defend our position,” wrote Kraken to X on Monday.

Kraken co-founder and former CEO Jesse Powell also blasted the SEC for being the “USA’s top decel,” labeling them “masochists” for not being satisfied with their earlier court defeats to crypto firms this year.

The agency lost a years-long lawsuit to Ripple in July, failing to convince the judge that the cryptocurrency XRP is, in itself, a security. It then lost a lawsuit to Grayscale in late August, forcing it to reconsider the company’s application to launch a Bitcoin spot ETF.

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

Kraken already paid a $30 million fine to the SEC in February to settle charges regarding its unregistered staking-as-a-service product.