Kraken Faces SEC Lawsuit Over Alleged Securities Violations and Asset Commingling

Cryptocurrency exchange Kraken is currently under fire as the U.S. Securities and Exchange Commission (SEC) recently filed a comprehensive 90-page lawsuit against the platform. This legal action places Kraken in the company of other major crypto exchanges that have come under scrutiny from the regulatory body.

Security Resilience Amidst Legal Challenges

Notably, Kraken has distinguished itself as the only major cryptocurrency exchange to never experience a security exploit. This exceptional track record in maintaining the security of user assets sets Kraken apart in an industry where security concerns are paramount.

The SEC’s lawsuit accuses Kraken of multiple violations of securities laws, including listing over a dozen unregistered securities on its platform. Furthermore, the exchange is alleged to have commingled customer funds with corporate assets, posing significant risks for both clients and the company.

Operating Outside the Regulatory Framework

According to the SEC’s press release, Kraken has been operating as an unregistered securities exchange, broker, dealer, and clearing agency in the United States since 2018. The accusations claim that Kraken unlawfully facilitated the trading of crypto asset securities, generating substantial profits in the process.

This legal action echoes similar charges brought against other major exchanges like Coinbase and Binance in June. The SEC mentions several “crypto asset securities” in the lawsuit, some of which were also part of previous lawsuits against  Binance and Coinbase. Notably, tokens like ALGO, ATOM, COTI, MANA, and OMG are specifically mentioned.

SEC Enforcement and Industry Accountability Gurbir S. Grewal, the SEC’s enforcement director, expressed concern over Kraken’s alleged prioritization of unlawful profits over investor protection. He emphasized the SEC’s commitment to holding Kraken accountable for its actions and sending a clear message to other industry participants to comply with regulations.

Kraken’s Stance and Industry Response Similar to the defenses put forth by Binance and Coinbase, Kraken denies the accusation of listing securities on its platform. The exchange argues that the SEC is interpreting securities laws too broadly. The comparison of cryptocurrencies to oranges or trading cards is cited, with the contention that they are not inherently investment contracts with an expectation of profit.

Commingling of Funds Raises Concerns

The lawsuit also addresses Kraken’s handling of customer assets, pointing to poor internal accounting practices that put customer funds at risk. The exchange allegedly used accounts holding customer assets to cover operational expenses, creating a significant risk of loss for customers. Kraken’s deficient internal controls are underscored by accounting deficiencies identified in 2020 and 2021.

Notably, the SEC mentions that Kraken’s internal auditor flagged the company’s practices as creating “a significant risk of loss” for customers. This includes instances where Kraken held $33.6 million worth of customer fiat within its corporate accounts as of December 31, 2021.

Past Settlement and Ongoing Legal Challenges

In February, Kraken settled with the SEC for $30 million over charges related to its staking-as-a-service product, which the SEC considered an unregistered security. This recent lawsuit adds to Kraken’s legal challenges and contributes to the ongoing discourse around regulatory compliance in the cryptocurrency industry.