Kraken Faces SEC Lawsuit Over Unregistered Operations in Cryptocurrency Market

Kraken, one of the globe's leading cryptocurrency exchanges, found itself in legal crosshairs on Monday when the U.S. Securities and Exchange Commission (SEC) filed a lawsuit against the platform. The SEC alleges that Kraken has been operating as an unregistered securities exchange, a violation that, according to the regulatory body, necessitates registration.

This legal action, unfolding in a San Francisco federal court, is part of SEC Chair Gary Gensler's broader initiative to extend regulatory oversight to the realm of cryptocurrency. Gensler contends that digital assets should be treated as investment contracts, thereby falling under the purview of federal securities laws. In response, Kraken asserts its intent to mount a vigorous defense, emphasizing that the regulation of cryptocurrency exchanges should be determined by Congress. The exchange categorically dismisses the SEC's perspective on digital assets as "incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy."

Kraken, headquartered in San Francisco, reassures its user base of over 10 million clients that the lawsuit will not impact their accounts. This legal development follows similar actions taken by the SEC against Binance, the world's largest cryptocurrency exchange, and Coinbase, the largest in the United States, in June. Both Binance and Coinbase are actively contesting the SEC's allegations.

The SEC claims that Payward Inc and Payward Ventures Inc, operating as Kraken, have generated hundreds of millions of dollars since 2018 through crypto transactions while allegedly neglecting securities laws designed to safeguard investors. Among the allegations are accusations of deficient internal controls and inadequate record-keeping. The SEC asserts that Kraken commingled customer funds with its own, utilizing customer accounts to cover operational costs. Gurbir Grewal, the SEC's enforcement chief, states that Kraken's failure to register has led to a business model fraught with conflicts of interest, posing a risk to investors.

In its response, Kraken contends that any supposed "commingling" merely involved the platform using fees it had already earned. The SEC's complaint, according to Kraken, inadvertently acknowledges this fact.

The SEC's legal action seeks a civil fine, disgorgement of allegedly ill-gotten gains, and an injunction to prohibit Kraken from operating as an unregistered exchange.

Established in 2011, Kraken boasts backing from investors such as Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge, and Tribe Capital.

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