Kraken faces SEC lawsuit alleging illegal securities exchange operations


21st November 2023 – (New York) Kraken, one of the prominent global cryptocurrency exchanges, found itself at the centre of a legal battle on Monday as the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the exchange. The SEC accused Kraken of operating as an unregistered securities exchange, a violation of federal securities laws.

The lawsuit, filed in a federal court in San Francisco, represents SEC Chair Gary Gensler’s efforts to bring cryptocurrency under the regulatory purview of the agency. Gensler contends that digital assets should be considered investment contracts and subject to federal securities laws.

Kraken has stated its intention to vigorously defend itself against the allegations, arguing that the regulation of cryptocurrency exchanges should be determined by Congress. The exchange vehemently disagrees with the SEC’s perspective on digital assets, describing it as legally incorrect, factually false, and potentially detrimental as a matter of policy.

Kraken also assured its more than 10 million clients that the lawsuit would not impact their operations or accounts.

This legal action by the SEC follows similar lawsuits brought against Binance, the largest cryptocurrency exchange globally, and Coinbr, the largest in the United States. Both exchanges are currently contesting the SEC’s claims.

According to the SEC, Payward Inc and Payward Ventures Inc, operating as Kraken, have conducted hundreds of millions of dollars’ worth of crypto transactions since 2018, allegedly disregarding securities laws meant to safeguard investors. The SEC further accused Kraken of lacking adequate internal controls and proper record-keeping, including commingling customer funds with its own and using customer accounts to cover operational costs.

The SEC’s enforcement chief, Gurbir Grewal, stated that Kraken’s failure to register had resulted in a business model characterized by conflicts of interest, putting investors’ funds at risk. Grewal emphasized that Kraken’s prioritization of unlawful profits over investor protection was a recurring issue in the cryptocurrency space.

Kraken responded to the SEC’s claims by asserting that any alleged “commingling” was merely Kraken utilizing fees it had already earned rather than mixing customer funds improperly.

The SEC’s lawsuit against Kraken seeks various remedies, including civil fines, disgorgement of unlawfully obtained gains, and an injunction against conducting exchange operations without proper registration.

Founded in 2011, Kraken has garnered support from notable investors such as Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge, and Tribe Capital.

The case, SEC v Payward Inc et al, is currently before the U.S. District Court in the Northern District of California, with the case number 23-06003.