On the 20th, the SEC (U.S. Securities and Exchange Commission) filed a lawsuit against the cryptocurrency exchange Kraken for operating as an unregistered securities exchange, broker, dealer, and clearing house.
According to the SEC's complaint, Kraken has made hundreds of millions of dollars by illegally facilitating the buying and selling of cryptocurrencies deemed securities since September 2018.
The SEC says Kraken failed to register its cryptocurrency exchange, broker, dealer, and clearing house services as required by law. This resulted in investors being denied important protections, such as SEC inspections, record-keeping requirements, and conflict of interest protections.
Kraken's violations
Specific violations of Kraken pointed out by the SEC are as follows:
- Using non-discretionary methods to aggregate securities orders from multiple buyers and sellers and provide a market in which such orders interact.
- Engaged in the business of executing securities transactions for Kraken's client accounts, acting as a broker.
- Engaged in the business of buying and selling securities for its own account, acting as a dealer.
- Intermediated transactions by Kraken's clients in crypto assets that were deemed to be unregistered securities, and acted as a securities depository and clearing house.
In its complaint, the SEC alleges that Kraken's business conduct, internal control deficiencies, and inadequate record-keeping practices created various risks for its clients. Kraken commingled client funds with its own funds, including by paying its operating expenses directly from accounts in which it held client cash.
Kraken also commingled client crypto assets with its own holdings, creating what its auditors say continues to create a "significant risk of loss" for its clients.
"We allege that Kraken has not complied with the securities laws and has made business decisions that have earned hundreds of millions of dollars from investors, created a business model rife with conflicts of interest, and put investor funds at risk," SEC Enforcement Director Gurbir S. Grewal said in a statement.
"Kraken's choice to pursue illegal profits over investor protection is one we see all too often in this space. Today we are holding Kraken accountable for its misconduct and sending a message to other companies that we will follow the law," he continued.
Kraken Strikes Back at the SEC
In response to the SEC's complaint, Kraken said, "We do not agree with the SEC. The law is on our side."
In response to the complaint against Kraken, Kraken explained that there was no fraud, market manipulation, customer losses due to hacking or security breaches, or breach of fiduciary duty. The company also claims that while the transactions involve large amounts of dollars, Kraken has never lost or misused a single dollar, has fully safeguarded customer funds on a 1:1 basis, and has not engaged in any Ponzi schemes or failed to maintain adequate reserves, making none of the SEC's allegations true.
The company also claims that the digital assets Kraken supports are in fact "investment contracts" and therefore require a special securities license to operate the exchange's business, but this is false both in law and fact and the SEC's response is "disastrous," Kraken said. It added that these SEC claims have been completely rejected in other court cases.
Kraken has been operating for over 10 years and is licensed, authorized and approved in the United States, the United Kingdom, the European Union, Canada and other countries around the world, including emerging markets.
In a statement, Kraken said, "Our mission is to accelerate the adoption of crypto assets so that everyone can achieve economic freedom and inclusion. Today's news does not distract from our mission. The services we provide are not affected and we will continue to provide our services without interruption."
This year, the SEC has been cracking down on companies in the cryptocurrency industry.
In response to this situation, a bipartisan bill to protect the cryptocurrency industry from the SEC is being discussed in the U.S. Congress. This bill would prevent the SEC from cracking down too much on the cryptocurrency industry.
Reference:SEC announcement,Kraken statement
Image: Shutterstock
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