SEC Files Lawsuit Against Crypto Exchange Kraken

The U.S. Securities and Exchange Commission (SEC) filed a 90-page lawsuit on Monday against the crypto exchange Kraken, placing it on the list of several crypto companies in the agency’s legal crosshairs.

The lawsuit accuses Kraken of a series of violations of securities laws and of mixing client funds with corporate assets in ways that could risk significant losses for both parties.

SEC Strikes Again

According to the accompanying SEC statement, Kraken has simultaneously operated as an unregistered securities exchange, broker, dealer, and clearing agency in the U.S., intertwining all such traditional services since 2018.

Specifically, the company has generated nine-figure profits by unlawfully facilitating the buying and selling of securities of crypto assets, the SEC states.

Such accusations mirror those that the SEC imposed on Coinbase and Binance in June, naming many of the same ‘crypto asset securities’ mentioned in previous lawsuits, along with some new tokens such as ALGO, ATOM, COTI, MANA, and OMG.

– Kraken’s choice of illegal profits over investor protection is one we too often see in this space, and today we hold Kraken accountable for its improper conduct and send a message to others to comply – stated SEC Chairman Gurbir S. Grewal.

In their defenses, Binance and Coinbase denied listing securities on their platforms, accusing the SEC of misinterpreting securities laws.

Binance, for example, compared the cryptocurrencies involved in an investment contract to oranges or trading cards, rather than to the investment contracts themselves, which inherently involve an expectation of profit.

Patent attorney Sandy Seth argued that the SEC’s arguments lack merit in both the case against Kraken and against Coinbase, largely for the same reasons.

– Investment contracts require some form of financial interest for the company, i.e., a joint venture. This is also why sports or concert tickets or antique cars or artworks are not securities – determined Seth.

Mixing Funds

Regarding the handling of customer assets, Kraken used poor internal accounting that jeopardized customer funds, including paying operational costs using accounts that held customer assets.

The agency highlighted that Kraken’s internal auditor stated that the company’s practice created a ‘significant risk of loss’ for customers. For instance, the auditor found that as of December 31, 2021, Kraken held user fiat assets worth $33.6 million in its corporate accounts.

The company’s poor internal controls reportedly led to accounting deficiencies related to client assets held in 2020 and 2021, which were only identified in August of this year.

– These errors are a result of Kraken’s poor record-keeping practices and failure to properly record transactions, highlighting deficient internal controls within the company – writes the SEC.

Kraken had previously paid $30 million in February to settle costs in an SEC lawsuit related to staking as a service product, which the SEC considered an unregistered security.