Key takeaways
- The US SEC has accused Kraken of operating an unregistered exchange, broker, dealer and clearing agency.
- This lawsuit against Kraken is similar to charges filed by the SEC against crypto exchanges Binance, Bittrex, and Coinbase earlier in the year.
- The lawsuit also alleges that Kraken commingled clients’ crypto assets and cash reserves with its own holdings.
- Earlier this year, Kraken paid a $30 million settlement for charges related to its staking-as-a-service offering.
The US Securities and Exchange Commission (SEC) fired a new salvo in its crackdown on cryptocurrencies on Monday when it sued Kraken for operating an unregistered stock exchange and allegedly commingling client funds with its own.
Kraken under scrutiny again
The regulator has long held the view that most cryptocurrency tokens are securities and cryptocurrency exchanges offering the sale of those tokens must register as such. The latest lawsuit against Kraken is not much different from those the SEC filed against rival exchanges Binance, Bittrex, and Coinbase (COIN) earlier this year.
Filed in a U.S. district court in California, the lawsuit against Kraken names specific cryptocurrencies that the SEC considers securities and alleges that Kraken is running an unregistered securities exchange by offering them for sale.
These tokens include Cardano (ADA), Cosmos (ATOM), Dash (DASH), Filecoin (FIL), Internet Computer (ICP), Polygon (MATIC), and Solana (SOL), among others.
This is the second enforcement action Kraken has faced this year, as the crypto exchange previously paid a $30 million settlement for charges related to its staking-as-a-service offering in February.
Combined Kraken Client Funds?
Mixing or commingling client funds with its own is another allegation Kraken faces in the SEC complaint.
“For example, Kraken has at times held client crypto assets valued at more than $33 billion, but has commingled these crypto assets with its own, creating what its independent auditor had identified in its audit plan as ‘a significant risk.’ of loss’ for their clients,” the document says.
The regulator also alleges that Kraken sometimes “paid operating expenses directly from bank accounts containing customer cash.” The company’s business practices, internal controls and record keeping were also found to be poor.
Combining user funds was also one of the accusations faced by the now-defunct crypto exchange FTX and its founder Sam Bankman-Fried.
“We allege that Kraken made a business decision to obtain hundreds of millions of dollars from investors rather than comply with securities laws. That decision resulted in a business model rife with conflicts of interest that put investor funds at risk,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.
Naturally, Kraken disagrees with the SEC.
“The SEC argues that digital asset trading platforms like Kraken can simply ‘walk in and register’ with the agency,” the company said in a blog post. “As most securities law experts know, there is no single law that supports this position.”
