The United States Securities and Exchange Commission has sued Kraken, alleging it commingled customer funds and failed to register with the regulator as a securities exchange, broker, dealer and clearing agency.
In a Nov. 20 complaint filed in San Francisco federal court, the SEC claimed that since 2018, Kraken had operated as a platform that unlawfully facilitated the buying and selling of cryptocurrencies.
A Kraken spokesperson told Cointelegraph it disagrees with the SEC’s complaint and plans to defend itself in court.
The lawsuit marks the latest push from the Gary Gensler-led agency to bring crypto under its purview, claiming that crypto assets are securities contracts under U.S. law.
“Without registering with the SEC in any capacity, Kraken has simultaneously acted as a broker, dealer, exchange, and clearing agency with respect to these crypto asset securities.”
Additionally, the SEC alleged Kraken’s business practices and “deficient” internal controls saw the exchange commingle up to $33 billion worth of customer assets with its own. The SEC said this resulted in a “significant risk of loss” for its clients.
The complaint claimed Kraken paid for operational expenses directly from accounts containing customer assets, citing the exchange’s independent auditor.
“We allege that Kraken made a business decision to reap hundreds of millions of dollars from investors rather than coming into compliance with the securities laws,” SEC enforcement division director Gurbir Grewal said in a statement. “That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk.”
Kraken pushed back against the SEC’s accusations with a spokesperson saying the exchange never listed unregistered securities.
“We disagree with the SEC’s complaint against Kraken, stand firm in our view that we do not list securities and plan to vigorously defend our position.”
“It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation and damages U.S. competitiveness globally,” the spokesperson said.
In a follow up Nov. 20 blog post, Kraken addressed the commingling accusations by saying that the SEC “cannot” claim that any customer funds are missing, adding that the “so-called ‘commingling’ is no more than Kraken spending fees it has already earned.”
The SEC’s complaint alleges Kraken violated the registration provisions of the Securities Exchange Act of 1934. It’s seeking Kraken pay penalties, injunctive relief and requests the exchange return its “ill-gotten gains.”
The accusations that Kraken operated as an unregistered broker for crypto assets echo those made in respective lawsuits against Coinbase and Binance in June.
On Feb. 9, Kraken reached a $30 million settlement with the regulator, where it agreed to cease offering crypto-staking products and services to U.S. customers.
Update (Nov. 21, 12:45 am UTC): This article has been updated to include comments from a Kraken spokesperson.