SEC Charges Kraken Exchange for Unregistered Operations

On November 20th, the U.S. Securities and Exchange Commission (SEC) announced charges against prominent U.S.-based cryptocurrency exchange Kraken. Since 2011,  kraken kraken a****[email protected] Centralised Exchange , encompassing Payward Inc. and Payward Ventures Inc., faces allegations of functioning as an unregistered broker, dealer, clearing agency, and securities exchange.

Why is Kraken Alleged as Illegal?

The SEC’s complaint highlights that Kraken has profited from the illegal sale and purchase of securities backed by cryptocurrency since at least September 2018. The exchange is accused of combining the roles of a broker, dealer, exchange, and clearing agency without the necessary registrations, thus depriving investors of critical protections such as SEC oversight, recordkeeping obligations, and safeguards against conflicts of interest.

Further, the SEC’s complaint highlights significant client risks due to Kraken’s business practices. The exchange is alleged to have mingled client funds with its own, using customer accounts to cover operational expenses and combining its cryptocurrency holdings with its clients, posing a substantial risk of loss.

Kraken’s platform is considered illegal by the SEC for several reasons. It establishes a marketplace acting as an exchange, processes transactions as a broker, buys and sells securities for its account as a dealer, and functions as a securities depository and clearing agency. According to the SEC, these activities necessitate proper registration, which Kraken failed to do.

Lawsuit and Penalties

Filed in a federal district court in San Francisco, the lawsuit claims Kraken breached the Securities Exchange Act of 1934 registration requirements. The SEC seeks disgorgement of profits, interest, penalties, and injunctive relief. Earlier in February, Kraken had agreed to pay a $30 million civil penalty and cease offering securities through crypto asset staking services or programs.