US Regulator Hits Kraken With Compliance Failure Claims

November 21, 2023
The US Securities and Exchange Commission has charged crypto exchange Kraken over a range of compliance violations dating back to 2018.

The US Securities and Exchange Commission (SEC) has charged crypto exchange Kraken over a range of compliance violations dating back to 2018. 

The SEC has charged Payward Inc. and Payward Ventures Inc (together known as Kraken) with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer and clearing agency.

According to the regulator’s complaint, since at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto-asset securities. 

“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. That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk,” commented Gurbir S. Grewal, the SEC’s enforcement director. 

“Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding Kraken accountable for its misconduct and sending a message to others to come into compliance.”

The SEC alleges that Kraken intertwines the traditional services of an exchange, broker, dealer and clearing agency without having registered any of those functions with the SEC as required by law. 

The crypto platform’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.

The SEC’s complaint also alleges that the company’s business practices, “deficient internal controls” and “poor recordkeeping practices” have resulted in a range of risks for its customers. 

As alleged in the complaint, Kraken also mixes its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. 

Further, Kraken also allegedly amalgamates its customers’ crypto-assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers.

Kraken wants Congressional action, not regulatory

When approached for comment by Vixio, a spokesperson for Kraken said that the company disagrees with the SEC’s complaint against Kraken. “We are 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,” said the spokesperson. “And despite opposition from lawmakers, the SEC continues to pursue legal action against these crypto exchanges.”

The spokesperson explained that, for years, the company has advocated for effective US market regulation that addresses the unique risks and benefits that crypto presents to all individuals. 

“We believe Congressional action is the most appropriate path to resolving the lack of regulatory clarity in the US,” said the spokesperson. “It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation, and damages US competitiveness globally.”

The SEC’s complaint, filed in federal district court in San Francisco, where the exchange is headquartered, alleges that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties.

In February, Kraken agreed to cease offering or selling securities through crypto-asset staking services or staking programmes and pay a civil penalty of $30m.

Meanwhile, in June, the SEC filed similar lawsuits against Binance, the world's largest crypto-asset exchange, and Coinbase, the largest in the United States. Both are defending against the regulator's claims.

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