Cryptocurrency exchange Kraken is facing legal action from the Securities and Exchange Commission (SEC) for allegedly operating as an unregistered securities business, marking the regulator’s latest crackdown on digital trading platforms. The SEC has accused Kraken, based in San Francisco, of failing to register as a securities exchange, clearing agency, broker, and dealer since at least September 2018. Furthermore, Kraken is alleged to have commingled its own funds with customer funds, occasionally using bank accounts containing users’ cash to cover operational expenses. The SEC claims that Kraken’s independent auditor identified this practice as a “significant risk of loss” to customers, with the exchange holding customer crypto assets valued at over $33 billion at times.
Gurbir Grewal, director of the SEC’s enforcement division, stated that Kraken prioritized profit over compliance with securities laws, resulting in a business model fraught with conflicts of interest and risks to investors’ funds. He emphasized that such a choice for unlawful profits over investor protection is too common in the cryptocurrency space. The SEC’s legal action against Kraken follows similar lawsuits against Binance and Coinbase earlier this year.
The regulator’s accusations come approximately a year after the collapse of FTX, a former prominent player in the sector. The trial of FTX CEO Sam Bankman-Fried revealed the sharing of the exchange’s customer assets with affiliated trading firm Alameda Research. Bankman-Fried was recently convicted of fraud and other charges in New York. Under the leadership of Chair Gary Gensler, the SEC has argued that most crypto tokens are securities, and many crypto exchanges are required to register with the agency.
The SEC’s complaint highlights issues in Kraken’s record-keeping for customers’ custodial assets, leading to material errors, as established by the company’s auditor in 2023. Despite challenges from the SEC for crypto exchanges to register, the agency continues to pursue legal action against them. Kraken vehemently disagrees with the SEC’s complaint, asserting that it does not list securities and plans to vigorously defend its position. As of December 2020 and 2021, the SEC alleges that approximately $30.8 million and $33.6 million of customer custodial cash, respectively, appeared to be in Kraken’s operational accounts. In February, Kraken agreed to pay $30 million and cease its crypto staking program in the US to settle separate charges brought by the SEC.