SEC sues Kraken over lack of registration

The U.S. Securities and Exchange Commission (SEC) has filed suit against Kraken’s parent companies for failing to register as a trading platform.

“Kraken acted as a broker, dealer, exchange, and clearing agency in relation to securities. […] The platform […] earned billions of dollars in fees […] without complying with […] the requirements of U.S. securities laws […] designed to protect investors,” the suit states.

The filing also asserts that Kraken’s business practices, internal controls and record-keeping posed additional risks.

“By failing to prevent conflicts of interest and merging user crypto assets worth $33 billion with its own, Kraken demonstrates why registration and investor protection […] are essential to the resilience of the U.S. capital markets,” the SEC said.

The agency highlighted the auditor’s statement that there was a “significant risk of loss” of client funds. In particular, officials noted that part of operating expenses were paid from bank accounts holding $5 billion belonging to users.

The SEC said it seeks a court order permanently prohibiting the defendants from violating securities laws and ordering disgorgement of the ill-gotten gains.

The plaintiff also seeks to bar Kraken from acting as an unregistered exchange, broker, dealer or clearing agency.

The regulator named a list of tokens it considered unregistered investment contracts, including Algorand (ALGO), MATIC and NEAR. The suit alleges that Kraken was directly involved in promoting these assets.

“We strongly disagree with the SEC’s allegations, we remain firm in our view that we do not list securities, and we intend to vigorously defend our position,” said Kraken chief David Ripley.

We strongly disagree with the SEC claims, stand firm in our view that we do not list securities, and plan to vigorously defend our position.

As we have seen before, the SEC argues that @krakenfx should “come in and register” with the agency, when there is no clear path to…

— Dave Ripley (@DavidLRipley) November 21, 2023

The executive lamented the lack of a clear registration mechanism at the agency for crypto-industry participants and condemned attempts to fashion policy by improper means.

Ripley pledged to support efforts to bring regulatory clarity and noted that Congress would be a priority on this issue.

In February 2023, the platform settled the charges brought by the Commission regarding the “unregistered” staking programstaking.

In March 2023, FBI conducted a search at the home of Kraken’s former head, Jesse Powell, as part of a criminal investigation into the hacking of the nonprofit organization he founded.

In autumn 2022, Powell stepped down as CEO of the platform, taking the chair of the board.

Back in May 2022, SEC Chair Gary Gensler said there was a possible enforcement against unregistered crypto exchanges. Before that, he described them as a primary focus in tightening oversight of the industry.

Since March 2023, the agency has opened civil investigations into Beaxy, Bittrex, Binance and Coinbase.

In September, Gensler said that intermediaries operating in the market such as brokers, dealers, or clearing agencies must register with the Commission.