What The Kraken Investigations Mean For Crypto Regulation

Kraken, a cryptocurrency exchange based in the U.S., is reportedly the subject of an investigation launched by the country’s Treasury Department, with the investigation said to have been ongoing since at least 2019.

According to reports, the United States Treasury Department’s Office of Foreign Assets Control (OFAC) is looking into crypto exchange Kraken for allegedly allowing consumers in Iran and other nations to buy and sell crypto to these jurisdictions, a potential infraction of current US sanctions.

The internal documents, which were leaked, show that Kraken has serviced 1,522 unique users with residences filed in Iran, with the data reflecting metrics until June 2022. Users from Syria and Cuba were also serviced, with both countries currently under U.S. sanctions.

The reports came first from the New York Times, in which the press outfit highlighted how Kraken would officially be the largest U.S. crypto firm to face such an enforcement action from the OFAC. Historically, the sanctions have been placed, in particular for Iran, since 1979. This sanction functions by prohibiting the export of goods or services (at scale) to citizens or individuals residing in or doing business from the country.

As a private company, Kraken is currently valued at roughly $11 billion. The crypto exchange has been the subject of regulatory actions in the past, with the most recent being a $1.25 million penalty levied against the firm by the Commodity Futures Trading Commission (CFTC). An earlier report from CryptoDaily also details how the firm’s CEO, Jesse Powell, has repeatedly courted controversy for offering to pay-off Kraken employees who were disgruntled over the company’s culture. Powell later stated that he had no regrets on the offense he made.

U.S. sanctions and regulatory oversight over the matter of firms violating its tenets have been a hallmark of the country’s geopolitical and diplomatic relations. The U.S. is notorious for chasing down any violator of the sanctions. In recent years, disgraced former U.S. president Donald Trump reinstated the sanctions in 2018, a move that was seen as indecisive, given an earlier withdrawal from a nuclear deal with Iran.

How does this affect the global crypto space, which Kraken and several competing exchanges all serve?

The fact that the U.S. is investigating crypto exchange Kraken for allegedly violating U.S. sanctions could have far-reaching implications for the crypto industry as a whole.

This news comes at a time when the crypto industry is already under intense scrutiny from global regulators. In the U.S., the Securities and Exchange Commission (SEC) has been ramping up its enforcement actions against crypto companies, while in China, authorities have cracked down on crypto exchanges and ICOs.

The investigation on Kraken is a precedent of how state authority is creeping into the decentralized sphere of crypto, a move that is expected of any nation-state, but also one that shows that crypto and blockchain technology, when exposed to the whims of a state’s authority, is no longer what it was first envisioned to be: that is to say, a movement for freedom from centralized control. Increasingly, regulatory frameworks imposed on crypto have sought to undermine its initial libertarian project. The U.S. investigation on Kraken is just one example of this trend.

“Kraken closely monitors compliance with sanctions laws and, as a general matter, reports to regulators even potential issues,” shares Marco Santori, Chief Legal Officer at Kraken. According to Santori, Kraken is committed to expanding its compliance team, in line with the exchange’s own growth and scale as a business.

Compliance is one thin, red line that crypto companies cannot afford to cross if they want to stay in business. The news of the investigation will likely cast a shadow over the crypto industry in the short term, as it highlights the regulatory risks that crypto businesses face. In the long term, however, this could be a positive development, as it could lead to greater clarity and better protection for the consumer level.

Kraken joins the scope of regulatory scrutiny alongside other crypto firms and outfits such as Celsius and Voyage, with more stringent procedures for assessment being laid down, following the collapse of Terra’s UST stablecoin and its LUNA token. Binance, meanwhile, as a competing crypto exchange platform, has also been called out for allegedly violating US sanctions against the same country, Iran. Binance quickly issued a statement which said that while it has blocked access from Iran and several other banned jurisdictions, it was possible that users from these countries accessed their exchange through a VPN (virtual private network), although this claim has not been substantiated to date.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice. Opinions stated herein are solely of the author’s, and hence do not represent or reflect CryptoDaily’s position on the matter.