SEC Charges Kraken In Ongoing Crypto Exchange Regulatory Push

The Securities and Exchange Commission (SEC) has initiated legal proceedings against Kraken, a well-known cryptocurrency exchange, for allegedly operating without proper registration as a securities business. This action is part of a broader enforcement effort by the SEC targeting digital asset trading platforms.

Kraken, based in San Francisco, is accused of operating without the necessary registrations as a securities exchange, clearing agency, broker, or dealer since September 2018. This case adds to a growing list of enforcement actions by the SEC in the digital asset sector, including lawsuits against Binance and Coinbase.

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Commingling Funds And Operational Risks

The SEC's charges against Kraken include the commingling of the exchange's funds with customer assets. This practice involves using bank accounts holding user funds for operational expenses. An independent audit highlighted this as a significant risk, potentially endangering customer assets. The SEC noted that at times, Kraken held customer cryptocurrency assets exceeding $33 billion in value.

Gurbir Grewal, the SEC's enforcement division director, criticized Kraken's business practices, stating, "Kraken’s choice of unlawful profits over investor protection is a pattern too common in this sector." He emphasized the company's prioritization of profits over compliance with securities laws, resulting in a business model fraught with conflicts of interest and risks to investors.

The Fallout Of FTX And SEC's Stance On Crypto

The action against Kraken follows approximately a year after the collapse of FTX, another major player in the cryptocurrency exchange market. The fall of FTX, along with the conviction of its CEO Sam Bankman-Fried for fraud and other charges, highlighted the risks associated with the commingling of customer assets with affiliated entities.

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Under the leadership of Gary Gensler, the SEC has maintained that most crypto tokens qualify as securities and that numerous crypto exchanges should register with the agency. The SEC's complaint points out that Kraken's auditor in 2023 identified significant record-keeping issues related to custodial assets, leading to material errors in the company's financial statements for 2020 and 2021.

Kraken's Response To The Allegations

In response to the SEC's allegations, Kraken has expressed disagreement with the complaint, maintaining that it does not list securities and intends to defend its position robustly. The company criticized the SEC for challenging crypto exchanges to register without clear legal backing or a defined path to registration. Kraken emphasized the ongoing legal actions by the SEC against crypto exchanges, despite opposition from lawmakers.

The SEC's complaint further alleges that approximately $30.8 million and $33.6 million of customer custodial cash were found in Kraken's operational accounts in December 2020 and 2021, respectively.

Settlement Of Previous Charges

Kraken, while smaller compared to other major exchanges, remains a popular choice in the crypto sector. In February, the company agreed to pay $30 million and cease its crypto staking program in the US to settle separate charges brought by the SEC.

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