SEC accuses Kraken of commingling customer funds, operating unregistered exchange

The US Secu­ri­ties and Exchange Com­mis­sion accused cryp­to exchange Kraken’s par­ent com­pa­nies of oper­at­ing an unreg­is­tered exchange. 

The alle­ga­tions came in a new law­suit filed by the US secu­ri­ties reg­u­la­tor on Mon­day. The claims fol­low sim­i­lar alle­ga­tions con­tained in court com­plaints against Coin­base and Binance filed ear­li­er this year. 

Pay­ward and Pay­ward Ven­tures were named as defen­dants in the new law­suit. Krak­en did not imme­di­ate­ly return a request for comment. 

“Kraken’s busi­ness prac­tices, defi­cient inter­nal con­trols and inad­e­quate record­keep­ing present a range of addi­tion­al risks that would also be pro­hib­it­ed for any prop­er­ly reg­is­tered secu­ri­ties inter­me­di­ary,” the com­plaint alleges.

An accom­pa­ny­ing SEC press release alleges that Krak­en has “made hun­dreds of mil­lions of dol­lars unlaw­ful­ly facil­i­tat­ing the buy­ing and sell­ing of cryp­to asset secu­ri­ties” since at least 2018.

The SEC claims that Krak­en know­ing­ly “engaged in the con­duct of a secu­ri­ties exchange” and also “described itself as one,” though it is not.

The reg­u­la­to­ry agency claims that Krak­en oper­at­ed not only as an unreg­is­tered exchange but also as an unreg­is­tered bro­ker, deal­er and clear­ing agency.

In addi­tion to oper­at­ing with­out reg­is­tra­tion, the SEC claims that Krak­en com­min­gled cus­tomer cryp­to assets “with its own.”

Accord­ing to the suit, an inde­pen­dent audi­tor report­ed­ly hired by Krak­en iden­ti­fied in its audit report that Kraken’s com­min­gling pre­sent­ed “a sig­nif­i­cant risk of loss” to its customers.

“In fact, Krak­en has at times paid oper­a­tional expens­es direct­ly from bank accounts that hold cus­tomer cash,” the suit alleges. 

“In fail­ing to pre­vent known con­flicts of inter­est and com­min­gling its investors’ assets with its own, Krak­en demon­strates why reg­is­tra­tion and the investor pro­tec­tions that come with reg­u­la­to­ry over­sight are crit­i­cal to the sound­ness of the Unit­ed States cap­i­tal mar­kets,” the SEC said.

Addi­tion­al­ly, the SEC’s com­plaint list­ed out cryp­to assets it claims are secu­ri­ties. The list is unsur­pris­ing­ly famil­iar, with many of the tokens tar­get­ed list­ed in the Commission’s suits against both Binance and Coin­base. Exam­ples include AXS, ALGO, ATOM, MATIC, SOL and DASH, among others.

Ear­li­er this year, the SEC accused Binance of com­min­gling cus­tomer funds. Binance has denied the SEC’s claims. 

In Feb­ru­ary, Krak­en set­tled with the SEC over its cryp­to stak­ing pro­gram. It did not, how­ev­er, admit nor deny the SEC’s allegations.

“At all rel­e­vant times, the Krak­en Stak­ing Pro­gram was offered and sold as an invest­ment con­tract and there­fore a secu­ri­ty whose offers and sales were sub­ject to the reg­is­tra­tion require­ments of the fed­er­al secu­ri­ties laws,” the SEC said in a court fil­ing at the time. 

Ben Strack con­tributed reporting.

Updat­ed Nov. 20, 2023 at 6:04 pm ET: Clar­i­fied the SEC’s com­plaint regard­ing the cryp­to assets it con­sid­ers securities.

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