Kraken is facing allegations from the U.S. Securities and Exchange Commission (SEC), following in the footsteps of prominent platforms like Coinbase and Binance. The SEC has taken legal action against Kraken’s parent companies, Payward and Payward Ventures, accusing them of engaging in pseudo-online trading activities and violating federal securities laws.
Kraken, a cryptocurrency exchange, asserts that its operations remain unaffected. Kraken addresses the regulatory challenge by stating that the complaint does not allege fraud. According to Kraken, the SEC’s complaint lacks accusations of fraud, market manipulation, customer losses from hacking or compromised security, and breaches of fiduciary duty. The crypto exchange highlights that while substantial dollar amounts are mentioned, the complaint does not assert any missing or misused funds, ruling out accusations of a Ponzi scheme, inadequate reserves, or failure to safeguard client funds.
Kraken specifically disputes the SEC’s claim that its products qualify as investment contracts, asserting that it is “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”
Faryar Shirzad, Chief Policy Officer of Coinbase, commented on the lawsuit in a post on X, emphasizing the importance of applying actual laws in accordance with the rule of law—a longstanding tradition and legal requirement since America’s founding and a fundamental aspect of government operating with the consent of the governed.
According to the SEC’s filing in the Northern District of California, Kraken allegedly failed to register with the SEC in any capacity while functioning as a broker, dealer, exchange, and clearing agency for various assets considered securities under U.S. law.
The SEC accuses Kraken of evading regulatory oversight and violating capital requirements designed to protect investors, shifting risks to the public, and pocketing billions in fees and trading revenue. The lawsuit extends its focus to Kraken’s business operations, internal controls, and record-keeping. The SEC alleges that Kraken commingled customer deposits with its own assets, causing significant losses for its customers.
Kraken is accused of holding over $33 billion in customers’ crypto and blending it with its own assets. Similarly, the platform allegedly mixed over $5 billion in customers’ cash with its own funds, even directly paying operating expenses from customers’ cash accounts on two occasions.
Furthermore, the federal regulatory agency listed tokens, including Algorand (ALGO), Polygon (MATIC), NEAR Protocol (NEAR), as securities. According to the lawsuit, Kraken directly promoted these tokens to the investing public.
In light of these allegations, the SEC seeks a permanent injunction from the court, compelling the defendants to comply with securities laws and requiring the repayment of losses. Additionally, the commission aims to “disgorge” Kraken’s roles as a trading platform, broker, dealer, and clearing agency. Notably, Bittrex faced a similar fate earlier, with the closure of its U.S. branch after encountering comparable challenges.
Earlier this year, the SEC sued Kraken’s parent companies, Payward Ventures, and Payward Trading, for “failing to register a cryptocurrency futures trading program.” The parent companies agreed to halt the program and pay $30 million for restitution, pre-judgment interest, and civil penalties.