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SEC sues Kraken as an unregistered exchange, mixing users funds

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On November 20, the US Securities and Exchange Commission (SEC) filed a complaint against Kraken's parent companies, Payward and Payward Ventures, in a San Francisco federal court. Essentially, the claims are directed at Kraken, alleging that it "acted as an exchange, a broker, a dealer, and a clearing agency" without the required registrations.

Kraken’s CEO, Dave Ripley, said that the company disagrees with the charges and will defend itself in court. Meanwhile, the co-founder Jesse Powell spoke out strongly about the problems of cryptocurrency regulation in the US and the SEC.

SEC’s charges against Kraken: asset commingling, risks to customers, and listing of unregistered securities

The SEC's complaint revolves around three main points: failure to segregate customer funds, offering unregistered securities, thus gaining money illegally.

1️⃣Kraken did not segregate customer funds from its own. This applies to crypto assets totaling $33 billion and also $5 billion in cash. Moreover, the exchange paid part of its operating expenses from the accounts where users' funds were stored. 

According to the SEC, this lack of control poses risks to users.

2️⃣ 16 crypto assets traded on Kraken are unregistered securities. Those are Cardano, Axie Infinity, Algorand, Cosmos, Chilliz, COTI, Dash, Filecoin, Flow, Internet Computer, Decentraland, Polygon, Near, OMG Network, Sandbox, and Solana.

This list is not new, and these coins have been mentioned in earlier SEC cases against Coinbase, Binance, and Bittrex exchanges. 

As stated in the complaint, "without registering with the SEC in any capacity, Kraken has simultaneously acted as a broker, dealer, exchange, and clearing agency with respect to these crypto asset securities."

3️⃣  The SEC believes Kraken is earning money illegally. The SEC is asking the court to prohibit Kraken from operating as an unregistered securities exchange, broker, and clearing agency. The regulator also demands the return of all illegally obtained gains.

The Sec had a productive year in 2023, recovering $5B in 784 lawsuits. It seems that the regulator  is maintaining its momentum into the next year.

Kraken’s response to the SEC's complaint

Kraken’s CEO Dave Ripley and co-founder Jesse Powell adressed the SEC's allegations. Ripley stated that the company disagrees with the regulator's lawsuit and will "stand up to these allegations and defend the crypto industry's right to exist in the U.S.".

The CEO also notes that the SEC's requirements for crypto company registration are impossible to fulfil due to the lack of a clear regulatory framework.

Jesse Powell expressed stronger sentiments, calling the SEC "the USA's top decelerator". He characterised the regulator’s move to profit through the court of California after setbacks in New York, citing the recent SEC court ruling against Ripple Labs and the withdrawal of the lawsuit against Ripple executives.

Moreover, in another tweet, Powell refers to the US as a "warzone" for crypto companies, recalling Kraken’s $30 million fine the company paid 10 months ago for providing staking services to customers. He warned that crypto businesses unable to bear such costs should change their place of incorporation.

This is not the first such accusations appear, regarding the US. In August, founder of dYdX Antonio Juliano advised developers to forget about the US market for the next 5–10 years in the context of discussing new tax regulations for the crypto industry proposed by the US Treasury Department and the Internal Revenue Service (IRS).

You might also like:

Kraken turns 42K users data to IRS to collect taxes

Kraken to launch trading in stocks and ETFs in 2024

What's the deal with SEC chair Gary Gensler?

Maria Kachura
Maria Kachura

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