Crypto Exchange Kraken Accused by SEC of Violating Securities Law

The filing is the latest against a major exchange as the SEC ratchets up its efforts to regulate the industry.

Crypto exchange Kraken on Monday became the latest major crypto exchange to face a lawsuit by the Securities and Exchange Commission (SEC) for allegedly violating securities law.

The agency accused San Francisco-based Kraken of mixing customer and corporate funds while acting as an unregistered “broker, dealer, exchange and clearing agency.”

“In doing so, Kraken has created risk for investors and taken in billions of dollars in fees and trading
revenue from investors without adhering to or even recognizing the requirements of the U.S. securities laws that are designed to protect investors,” the SEC complaint said, adding: “Kraken’s business practices, deficient internal controls, and inadequate recordkeeping present a range of additional risks that would also be prohibited for any properly registered securities intermediary.”

The SEC filing comes roughly five months after the agency, which has ratcheted up its scrutiny of the crypto industry this year, also sued Binance, the world’s largest digital asset exchange, and publicly traded Coinbase for allegedly breaking securities law. The SEC said in its complaints that neither had registered as trading platforms and that Binance had also improperly commingled customer funds. In August, the SEC reached a settlement with the exchange, Bittrex, which agreed to pay a $24 million fine for offering investors unregistered securities.

Under SEC purview

In its complaint against Kraken, the SEC said that the exchange had commingled up to $33 billion in customer and its own digital assets, “creating what its independent auditor had identified in its audit plan as ‘a significant risk of loss’ to its customers,” and similarly mixed more than $5 billion of customers’ cash “with some of its own.” The agency also said that Kraken “had paid operational expenses directly from bank accounts that hold customer cash.”

“By operating a platform on which crypto assets are offered and sold as investment contracts, Kraken’s operations place it squarely within the purview of U.S. securities laws,” the complaint said.

Similar to its Binance and Coinbase filings, the SEC listed a number of tokens as unregistered securities, including SOL, ADA and MATIC, the tokens of the smart contracts platforms Solana, Cardano and Polygon, respectively.

In a statement on its blog, Kraken criticized the SEC decision.

“The complaint against Kraken alleges no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty,” Kraken said. “It includes big dollar amounts but does not allege a single one of those dollars is missing or misused.”

Kraken added: “Instead, the complaint makes a technical argument: that Kraken’s business requires special securities licenses to operate because the digital assets we support are really “investment contracts.” This is incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”

In a late Monday post on X (formerly Twitter), Kraken CEO David Ripley vowed “to vigorously defend our position.”

We strongly disagree with the SEC claims, stand firm in our view that we do not list securities, and plan to vigorously defend our position.

As we have seen before, the SEC argues that @krakenfx should “come in and register” with the agency, when there is no clear path to…

— Dave Ripley (@DavidLRipley) November 21, 2023