SEC Sues Kraken for Alleged Regulatory Violations and Commingling of Funds
The United States Securities and Exchange Commission (SEC) sues Kraken, a cryptocurrency exchange, accusing it of mixing customer funds with its own and failing to register as a securities exchange, broker, dealer, and clearing agency. According to a complaint filed on November 20 in a federal court in San Francisco, the SEC asserts that since 2018, Kraken has been operating a platform that illegally enabled the trading of cryptocurrencies.
In response to these allegations, a Kraken spokesperson expressed disagreement with the SEC's charges and indicated the company's intention to contest them in court. This lawsuit is the latest effort by the SEC, under Gary Gensler's leadership, to extend its regulatory authority over the crypto industry by classifying crypto assets as securities contracts under U.S. law. The SEC's complaint also alleges that Kraken's business practices and inadequate internal controls led to the co-mingling of customer assets, totaling up to $33 billion, with its own funds. This, according to the SEC, posed a significant risk of loss for its clients. The complaint cites instances where Kraken reportedly used customer funds to cover operational expenses, based on findings from the exchange's independent auditor. Gurbir Grewal, the SEC enforcement division director, stated,
“We allege that Kraken made a business decision to reap hundreds of millions of dollars from investors rather than coming into compliance with the securities laws. This resulted in a business model filled with conflicts of interest and put investors’ funds at risk.” In a rebuttal, Kraken maintained that it has never listed unregistered securities. The case involves crypto asset securities, including cryptocurrencies trading under symbols such as ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SOL.