US SEC sues Kraken over failure to register

by Jonathan Adams
cybersecurity specialist

The lawsuit is the latest step in SEC Chair Gary Gensler’s push to bring crypto currency under his agency’s purview, by arguing that digital assets are investment contracts subject to federal securities laws

Kraken, one of the world’s biggest crypto currency exchanges, was sued on Monday by the U.S. SEC, which accused it of illegally operating as a securities exchange without first registering with the regulator.

The lawsuit in San Francisco federal court is the latest step in SEC Chair Gary Gensler’s push to bring crypto currency under his agency’s purview, by arguing that digital assets are investment contracts subject to federal securities laws.

Kraken plans to defend itself, saying Congress should decide how to regulate crypto currency exchanges and calling the SEC view of digital assets “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”

The exchange also said the lawsuit will not affect its more than 10 million clients.

In June, the Securities and Exchange Commission filed similar lawsuits against Binance, the world’s biggest crypto currency exchange, and Coinbase, the biggest in the US.

The Securities and Exchange Commission said Payward Inc and Payward Ventures Inc, which operate as Kraken, have since 2018 made hundreds of millions of dollars arranging crypto purchases and sales while turning a “blind eye” to securities laws designed to safeguard investors.

Kraken was also accused of having deficient internal controls and insufficient record keeping, reflected in part in its commingling customer money with its own and paying operating costs directly from customer accounts.

Failing to register has “resulted in a business model rife with conflicts of interest that placed investors’ funds at risk,” SEC enforcement chief Gurbir Grewal said in a statement. Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space.

In its statement, Kraken said the SEC complaint conceded that any alleged “commingling” amounted to “no more than Kraken spending fees it has already earned.”

The Securities and Exchange Commission also accused Binance of commingling customer funds, after a Reuters report describing such conduct. Binance has refused the commingling accusation.

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