The SEC is once again suing the American exchange, Kraken, for operating without a license and mixing its clients’ money with its own. The SEC argued that Kraken’s unregistered operation in the United States deprived investors of obtaining safeguards against conflicts. The regulator accuses Kraken of making hundreds of millions of “illegal” dollars in profits since 2018, exchange defends itself in extensive letter.
The United States Securities and Exchange Commission (SEC) announced a lawsuit against Kraken and its parent company Payward Inc. and Payward Ventures, for operating without registration. The lawsuit argues that since 2018, the exchange has facilitated the buying and selling of cryptocurrencies, which deprived investors of “important protections.”
The SEC maintained that Kraken’s unregistered operation in the United States deprived investors of obtaining safeguards against conflicts, official inspections and support in maintenance requirements. In addition, he pointed out that the exchange had poor controls and poor maintenance practices by “mixing its clients’ money with its own.”
SEC Sues Kraken for “Mixing Customer Funds with Company Money”
Kraken argued “not to agree” and will seek to defend its position in court. He announced that the SEC’s lawsuit will not have an impact on service to his clients. He charged that the SEC did not accuse misuse of dollars or a Ponzi scheme.
Kraken alleged that the SEC used a “technical argument” of needing a securities license to operate, because it supposedly supports the operation of “digital assets” through the figure of “investment controls.” He recalled that the SEC has used the same argument before and it has been rejected by courts.
The SEC argued that Kraken engaged in the following:
- Providing a market using established and non-discretionary methods.
- Engaging in the business of carrying out securities transactions for Kraken accounts and operating as a broker.
- Engaging in the business of buying and selling securities on its own account without applicable exceptions, and therefore operating as an intermediary.
- Serving as an intermediary in the settlement of crypto asset securities transactions by Kraken clients and acting as a securities depository.
Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said the following:
“We allege that Kraken made a business decision to obtain hundreds of millions of dollars from investors rather than comply with securities laws. “That decision gave rise to a business model plagued by conflicts of interest that put investor funds at risk.”
The SEC’s complaint, filed in federal district court in San Francisco, alleges that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties.
Kraken: The SEC Has Not Published Any Framework for Trading Digital Assets
Kraken alleged that the SEC has not issued any rules describing how an order in a digital asset should be matched, nor any guidance on how to clear a trade involving digital assets. The exchange even alleged that “the regulator’s accusation is hollow.”
Kraken defended itself by arguing that Congress is moving forward on bipartisan legislation to establish clear registration and oversight frameworks for centralized trading exchanges. He even announced that he remains “highly committed to his users in the United States.”
“Congressional action by elected legislators, not enforcement by agencies, is the right path to creating a new law for centralized cryptocurrency trading platforms in the United States.”
By Audy Castaneda
