US sues crypto exchange Kraken over failure to register with SEC

New York – Kraken, one of the world’s largest cryptocurrency exchanges, was sued on Nov 20 by the US Securities and Exchange Commission (SEC), which accused it of illegally operating as a securities exchange without first registering with the regulator.

The lawsuit is the latest step in SEC chairman Gary Gensler’s push to bring cryptocurrency under his agency’s purview, by contending that digital assets are investment contracts subject to federal securities laws.

Kraken intends to defend itself, saying that Congress should decide how to regulate cryptocurrency exchanges and calling the SEC view of digital assets “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy”. The San Francisco-based exchange also said the lawsuit will not affect its more than 10 million clients.

In June, the SEC filed similar lawsuits against Binance, the world’s largest cryptocurrency exchange, and Coinbase, the largest in the United States. Both are defending against the regulator’s claims.

The SEC said Payward and Payward Ventures, which operate as Kraken, have since 2018 made hundreds of millions of dollars arranging crypto purchases and sales, while turning a “blind eye” to securities laws designed to protect investors.

Kraken is also accused of having deficient internal controls and inadequate record keeping, reflected in part in its commingling customer money with its own and paying operating costs directly from customer accounts.

Failing to register has “resulted in a business model rife with conflicts of interest that placed investors’ funds at risk”, SEC enforcement chief Gurbir Grewal said in a statement. “Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space.”

Kraken said the SEC complaint concedes that any alleged “commingling” amounted to “no more than Kraken spending fees it has already earned”.

The SEC also accused Binance of commingling customer funds, following a Reuters report describing such conduct. Binance has denied the commingling accusation.

The lawsuit on Nov 20 seeks a civil fine, disgorgement of ill-gotten gains and a halt to acting as an exchange without registering.

Kraken was founded in 2011. It is backed by investors including Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge and Tribe Capital. REUTERS