SEC Charges Abra, Prepares To Battle Kraken In Court

Abra is the latest CeFi lender to fall into the crosshairs of the U.S. Securities and Exchange Commission.

On Aug. 26, the SEC announced it had charged Plutus Lending LLC, for operating as an unregistered investment company and offering an unregistered securities product in the form of its retail crypto lending program, Abra Earn. The SEC said Abra began offering its Earn product to U.S. investors around July 2020.

The complaint noted that Abra marketed Earn as a vehicle for “auto-magically” earning interest on crypto assets. The SEC added that Abra held more than 40% of the non-cash assets invested in Earn, which were allocated to investment securities including crypto loans to institutional borrowers.

“Abra sold nearly half a billion dollars of securities to U.S. investors, without complying with registration laws designed to ensure that investors have sufficient, accurate information to make informed decisions before they invest,” said Stacy Bogert, Associate Director of the SEC’s Division of Enforcement.

Abra agreed to a pending settlement yet to be determined by a U.S. court.

At its peak, Abra Earn managed roughly $600 million in assets, nearly $500 million of which was deposited by U.S. investors. Abra ceased accepting new Earn customers in October 2022, and began winding down Earn in June 2023.

Notably, the SEC’s charges aren’t the first time Abra has run afoul of regulators. In June, Abra settled with 25 U.S. states for operating without requisite licensing, and agreed to return $82.1 million to U.S. investors.

In 2020, the SEC and the Commodity Futures Trading Commission (CFTC) also fined Abra $300,000 for offering unregistered “security-based swaps” to retail investors.

Kraken Faces Legal Heat

In related news, the SEC’s lawsuit against Kraken is set to go to trial.

The SEC sued Kraken in November 2023, alleging the firm facilitated unlicensed securities trades, commingled funds, and failed to register as a broker, clearinghouse, or exchange.

On Aug. 23, the U.S. District Court overseeing the case ruled that the SEC had “plausibly alleged” that some of the transactions facilitated by Kraken comprised securities investment contracts. As such, the judge permitted the case to proceed to trial.

“The meat of the SEC’s pleadings alleges that during their initial offerings and throughout subsequent transactions on Kraken, those assets were offered as, or sold as, investment contracts,” Orrick added. “This is an acceptable framing, and one that the SEC has repeatedly advanced in other cases.”

However, Marco Santori, Kraken’s chief legal officer at Kraken, noted that the judge reaffirmed recent court rulings asserting that crypto assets do not inherently comprise security assets.

“The way the SEC labels the crypto assets at issue — as ‘crypto asset securities’ — is unclear at best and confusing at worst, I do not understand the SEC to be alleging that the individual cryptocurrency tokens in which Kraken enables transactions are themselves securities,” the court said.

Santori said the judge’s comments confirmed “Kraken’s long-standing position that it does not list securities.”

In February 2023, Kraken also settled SEC charges alleging that its custodial staking program comprised unregistered securities. Kraken paid $30 million in penalties and ceased offering the service to U.S. customers.

SEC Enforcement actions

The SEC has steadily increased its scrutiny of the cryptocurrency industry over the years.

In 2013, the SEC launched its first Bitcoin-related enforcement action against Trendon Shavers, who was running a Ponzi scheme under the name “Bitcoin Savings and Trust,” resulting in $40 million in penalties. The SEC followed up with numerous actions against Initial Coin Offering (ICO) issuers following the 2017 ICO boom.

The SEC ramped up its efforts to target the crypto industry following Gary Gensler’s appointment to the head of the agency in April 2021, with Gensler asserting that most cryptocurrencies comprise unregistered security investment contracts.

However, Gensler’s campaign suffered a blow last October when Judge Analisa Torres, the judge overseeing the SEC’s complaint against Kraken, ruled that cryptocurrencies do not inherently comprise securities, regardless of whether their primary distribution was a securities offering.

In July, Judge Amy Bearman came to the same conclusion concerning charges brought against Binance by the SEC concerning its BNB and BUSD tokens.