SEC is filing charges against Kraken
The US Securities and Exchange Commission is again bringing charges against Kraken. The US crypto exchange only settled a costly legal dispute with the authorities in the spring. The new allegations use a well-known scheme.
Why is the SEC bringing charges against Kraken?
The US Securities and Exchange Commission is filing charges against crypto exchange Kraken, according to a press release . In the indictment, the authority once again speaks of illegal securities trading. The SEC usually makes this accusation against crypto companies.
“The SEC has filed charges against Payward Inc. and Payward Ventures Inc. , collectively known as Kraken , for operating the crypto trading platform of the same name as an unregistered securities exchange, broker, dealer and clearinghouse,” it says.
Hundreds of millions of US dollars that the crypto exchange has earned through these business activities since 2018 were generated illegally, according to the SEC. The authority also names 16 cryptocurrencies that it believes are not permitted.
ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND and SOL are therefore unregistered securities whose trading is illegal in the USA, according to the SEC.
Kraken’s plan involves intertwining the various activities in order to create an opaque mixture. In doing so, Kraken wants to make “illegal profits” , which Kraken attaches more importance to than the “security of investors”.
Because Kraken does not have a license to trade securities, The US Securities and Exchange Commission is unable to enforce the necessary supervision. This situation is intended to be improved through the legal dispute.
Kraken’s accounting was “poor” while the company’s internal governance was “defective,” according to the SEC’s indictment . This could lead to conflicts of interest – such as insider trading , which already occurred at competitor Coinbase.
SEC accuses Kraken of breach of trust
The US Securities and Exchange Commission also accuses Kraken of breach of trust. The crypto exchange should intertwine customer deposits with its own capital. The principle is therefore similar to a methodology used by FTX, which was only discovered in November 2022. FTX had stolen several billion in capital from its own customers in order to use it to generate profits.
“Kraken commingles its customers’ money with its own – including paying operating costs directly from accounts holding customer funds,” the regulator reports.
These symptoms occur both in the management of fiat currencies and in the custody of cryptocurrencies. According to an auditor, this creates an “enormous risk of loss” for customers.
“We allege that Kraken made a business decision to collect hundreds of millions of dollars from investors rather than comply with securities laws. “This decision resulted in a business model rife with conflicts of interest that puts investors’ funds at risk,” said Gurbir S. Grewal, Director of Enforcement.
The authority hopes that the lawsuit will send a signal. Crypto companies should contact The US Securities and Exchange Commission to initiate legitimate registration. Whether the US legal framework actually requires this is highly controversial. Many experts believe that US securities laws do not apply to crypto.
What does the lawsuit mean for the crypto exchange?
The crypto exchange itself rejects all allegations, as can be seen from a Twitter message . Kraken said it would vigorously defend this position in court. The company does not believe the SEC lawsuit has a good chance of success.
A similar legal dispute is to blame , which ended in July after two and a half years. According to the court, XRP publisher Ripple was only guilty of illegal securities trading in a few cases.
According to Kraken, users do not have to fear any restrictions: “We will continue to offer our customers the usual services without interruption.”
Kraken also shows no understanding for the SEC’s measures. This is how the company announces:
The SEC has repeatedly urged crypto exchanges to register without a single law supporting their position and without a clear path to registration.
Message is clear: $30m buys you about 10 months before the SEC comes around to extort you again. Lawyers can do a lot with $30m but the SEC knows that a real fight will likely cost $100m+, and valuable time. If you can’t afford it, get your crypto company out of the US warzone.
— Jesse Powell (@jespow) November 21, 2023
Kraken therefore wants to support a new, non-partisan law that creates the necessary clarity. Company founder Jesse Powell is clearer on Twitter. He writes cynically: “The biggest technology brake in the USA is back with another attack on America.”
Powell criticizes a $30 million fine agreed with The US Securities and Exchange Commission in February. The background was the provision of staking as a service – an offer that The US Securities and Exchange Commission criticized as unlawful.