SEC Sues Kraken Alleging Unlicensed Securities Trades and ‘Commingling’ of Customer Funds

Kraken, the popular U.S.-based centralized exchange, is the latest web3 entity to face legal action from the U.S. Securities and Exchange Commission, with the SEC accusing Kraken of illegally offering unlicensed securities to retail investors.

In a complaint filed on Nov. 20, the SEC claims Kraken operated as an unregistered broker, clearing agency, and dealer, and created “significant risk” for users by commingling $33B worth of customer assets.

“Kraken has held at times more than $5 billion worth of its customers’ cash, and it also commingles some of its customers’ cash with some of its own,” the SEC asserted. “Kraken has at times paid operational expenses directly from bank accounts that hold customer cash.”

The SEC additionally claims Kraken facilitated trade in unlicensed securities, including the MATIC, NEAR, and ALGO tokens, and accused the exchange of failing to maintain appropriate internal record-keeping.

The regulator is seeking fines, disgorgement of ill-gotten gains, and a halt on Kraken acting as an exchange without licensing as punishment.

The news serves as the latest example of the SEC waging war against the web3 industry via a campaign of regulation by enforcement.

The SEC levied similar complaints against Binance, the leading centralized exchange, and Coinbase, the top U.S.-based exchange, in June. Kraken also shuttered its custodial staking service as part of a settlement with the SEC in February.

Coinbase pledged to fight the charges. The exchange filed its own lawsuit against the SEC in April for failing to adhere to its formal rule-making process when regulating the crypto industry.

In a statement published to its website, Kraken also vowed to fight the SEC’s lawsuit.

“The complaint against Kraken alleges no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty,” Kraken said. “Instead, the complaint makes a technical argument: that Kraken’s business requires special securities licenses to operate because the digital assets we support are really ‘investment contracts’. This is incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”

Kraken noted U.S. District Judge Analisa Torres’ July ruling that assets sold via securities contracts do not automatically comprise securities that threw a wrench into the SEC’s lawsuit against Ripple Labs.

“The SEC argued in that case that digital assets bought and sold on trading platforms were really securities transactions,” Kraken said. “The Federal Court for the Southern District of New York disagreed, ruling that the SEC failed entirely to satisfy the relevant legal test… The SEC’s case against Kraken will fail, too, and for the same reasons.”

The exchange also said the SEC’s allegation of commingling customer funds refers to “Kraken spending fees it has already earned.” Kraken said it will continue to provide services to its users “without interruption” in spite of the lawsuit.

The SEC dropped its complaint against Ripple in October, 34 months after first filing the suit.

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• Source: https://thedefiant.io/sec-sues-kraken-alleging-unlicensed-securities-trades-and-commingling-of-customer-funds