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The top Wall Street watchdog has sued popular cryptocurrency exchange Kraken, alleging it operated as an unregistered securities business in the regulator’s latest crackdown on digital trading platforms.
The charges against San Francisco-based Kraken add to the list of Securities and Exchange Commission clampdowns on the digital asset sector this year, notably lawsuits against Binance — the world’s largest crypto exchange — and US-listed rival Coinbase.
Kraken was charged with failing to register as a securities exchange, clearing agency, broker and dealer since at least September 2018.
The SEC also accused Kraken of mixing its own funds with its customers’ — at times using bank accounts holding users’ cash to pay for its operational expenses. According to the civil complaint, Kraken’s independent auditor had identified the practice of commingling as a “significant risk of loss” to the platform’s customers. At times the exchange held customer crypto assets valued at more than $33bn, the SEC said.
“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,” Gurbir Grewal, director of the SEC’s enforcement division, said. “That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk.”
He added: “Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space.”
The regulator’s accusations come about a year after the collapse of FTX, the former darling of the sector. Evidence presented in the trial of FTX chief executive Sam Bankman-Fried revealed how the exchange’s customer assets were shared with affiliated trading firm Alameda Research. Bankman-Fried was convicted of fraud and other charges in New York earlier this month.
Under chair Gary Gensler, the SEC has argued most crypto tokens are securities and many crypto exchanges are required to register with the agency.
According to the SEC’s complaint, Kraken’s auditor in 2023 established that issues in the company’s record-keeping for customers’ custodial assets had led to “material errors” in its 2020 and 2021 financial statements.
Kraken said: “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.”
“The SEC has repeatedly challenged crypto exchanges to come in and register without a single law supporting their position and no clear path to registration. And despite opposition from lawmakers, the SEC continues to pursue legal action against these crypto exchanges,” the company said.
As of December 2020 and 2021, respectively about $30.8mn and $33.6mn of customer custodial cash appeared to be in Kraken’s operational accounts, the SEC alleged.
Kraken is a smaller crypto exchange yet still one of the most popular in the sector. The company in February agreed to pay $30mn and cease its crypto staking programme in the US to settle separate charges brought by the SEC.