SEC Files 90-Page Lawsuit Against Kraken

The U.S. Securities and Exchange Commission (SEC) has taken decisive action against cryptocurrency exchange Kraken, filing a comprehensive 90-page lawsuit that thrusts the platform into the legal spotlight alongside other major crypto players.

The SEC’s lawsuit alleges numerous securities law violations by the exchange, pointing to the commingling of customer funds with corporate assets, a practice that poses significant risks for both parties involved. The agency contends that Kraken has operated as an unregistered securities exchange, broker, dealer, and clearing agency in the United States since 2018.

Kraken is accused of generating nine-figure profits by unlawfully facilitating the buying and selling of crypto asset securities. This echoes charges previously levied by the SEC against Coinbase and Binance in June, implicating several similar “crypto asset securities” alongside new tokens such as ALGO, ATOM, COTI, MANA, and OMG.

SEC Director’s Message and Industry Response

Gurbir S. Grewal, the SEC’s enforcement director, emphasized the agency’s commitment to holding the exchange accountable for its alleged misconduct. Grewal stated, “Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space.” Meanwhile, Binance and Coinbase, in their defenses, have vehemently denied listing securities on their platforms and accused the SEC of overly broad interpretations of securities laws.

Legal experts, including patent lawyer Sandy Seth, argue that the SEC’s arguments lack merit in both the Kraken and Coinbase cases. Seth highlights the necessity for financial interest in a company for an investment contract, asserting that items like sports tickets, concert tickets, antique cars, or art do not fall under the category of securities.

Kraken’s Handling of Customer Assets

The SEC sheds light on the exchange’s poor internal accounting practices, which allegedly put customer funds at risk. Kraken’s internal auditor identified deficiencies, revealing that, as of December 31, 2021, the exchange held $33.6 million worth of customer fiat within its corporate accounts.

Kraken’s legal troubles aren’t new; in February, the platform paid $30 million to settle charges related to its staking-as-a-service product, considered an unregistered security by the SEC. The recent lawsuit underscores the ongoing regulatory scrutiny faced by major players in the crypto space.