The US Securities and Exchange Commission (SEC) has found its next prey in the cryptocurrency sector as it accused Kraken of operating as an unregistered platform and for mixing customer funds.
In the new lawsuit, the regulator claimed that the crypto exchange commingled customer and corporate funds while operating as an unregistered broker, clearing agency and dealer.
In doing this, Kraken violated federal securities laws, said the SEC, which also has similar suits against other crypto trading platforms like Binance and Coinbase.
The regulator held: “Without registering with the SEC in any capacity, Kraken has simultaneously acted as a broker, dealer, exchange, and clearing agency with respect to these crypto asset securities. 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 recognising the requirements of the US securities laws that are designed to protect investors.”
A key thing highlighted in the suit was how Kraken created a “significant risk” by commingling up to $33billion in customer crypto with its own corporate assets. The SEC said that this created what its own independent auditor had identified in its audit plan as “a significant risk of loss” to its customers. Adding on, it claimed:
“Kraken has at times paid operational expenses directly from bank accounts that hold customer cash. In addition, during 2023, the independent auditor determined that issues related to Kraken’s recordkeeping for customer custodial assets had resulted in material errors to Kraken’s financial statements for 2020 and 2021.”
The SEC then identified a number of tokens that it deemed to be unregistered securities. This includes Algorand’s $ALGO, Polygon’s $MATIC, $SOL and $NEAR. The commission alleged that Kraken took a direct role in promoting these tokens to the investing public.
The lawsuit was much the same as the SEC’s complaints against Binance and Coinbase, two exchanges that the agency has previously sued. Filed last year, both of these suits are still pending.
Amongst other things, Binance, Binance.US and its founder and CEO Changpeng “CZ” Zhao were accused of offering unregistered securities to the general public in the form of $BNB token and Binance-linked $BUSD stablecoin.
A day after filing this, SEC went after Coinbase, where it held that the exchange operated as an unregistered broker, exchange and clearing agency simultaneously, arguing that it solicited customers, handled orders, allowed for bids and acted as an intermediary all at once.
The filing against Kraken now seeks to permanently ban the exchange from operating as an unregistered exchange, while also pursuing a fine. The SEC also wants Kraken to give back ill-gotten gains.
However, in a statement published by the CEO of the exchange, Dave Ripley, Kraken has denied all of the allegations and has called for Congressional action to bring clarity to the “chaotic environment that has been created in the US”.
The post further read: “We disagree with the SEC’s complaint against Kraken, stand 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.
“And despite opposition from lawmakers, the SEC continues to pursue legal action against these crypto exchanges. For years, we have advocated for effective U.S. market regulation that addresses the unique risks and benefits which crypto presents to all individuals.”