Explainer: What is happening with the SEC and Kraken?

What happened?

The Securities and Exchange Commission (SEC) sued cryptocurrency exchange Kraken on Monday November 21, alleging it violated investor protection laws that require compliance with stock exchange rules.

The SEC claims Kraken acted as a broker, dealer, exchange, and clearing agency without registering with the regulator.?

Kraken disputes the claims, saying it does not list securities. The exchange previously paid $30 million over crypto staking services SEC deemed unregistered securities offerings.

The complaint echoes similar SEC allegations against Coinbase which that exchange is fighting in court. This shows the regulator continues asserting crypto firms must follow securities market rules.?

Kraken allegedly commingled customer assets, creating significant loss risk. The exchange also supposedly paid expenses from customer cash holdings.

Through lawsuits, the SEC aims to compel crypto companies to register or comply with longstanding Wall Street regulations.

What is the SEC accusing Kraken of specifically?

Operating as an Unregistered Exchange

The SEC alleges that Kraken operated a platform that matched orders from multiple buyers and sellers of crypto asset securities. By providing this trading facility and using non-discretionary methods to allow orders to interact and agree to trade terms, the SEC claims Kraken functioned as an exchange but did not register with the SEC.

Acting as an Unregistered Broker and Dealer

The SEC claims Kraken regularly solicited customers, provided accounts and interfaces to enter trade orders, handled customer funds and assets, offered margin trading, and charged fees on transactions. By effecting securities transactions for customers and buying/selling securities for its own account without registering as a broker-dealer, it alleges that Kraken violated securities laws.?

Functioning as an Unregistered Clearing Agency

According to the complaint, the SEC says Kraken acted as an intermediary in settling securities trades, maintaining a central depository for securities, and reducing settlements without registering as a clearing agency. The SEC also says Kraken internally recorded debit/credits to settle trades instead of using blockchain transfers.

Commingling Assets and Control Failures

The SEC alleges Kraken commingled customer and corporate crypto assets and cash, risking customers’ abilities to withdraw funds. Auditors also identified material accounting errors and internal control deficiencies related to recording customer assets.

Trading Crypto Asset Securities

Finally, the SEC claims that crypto assets traded on Kraken’s platform were investment contracts and thus securities. By facilitating unregistered broker-dealer activities regarding these securities, Kraken violated U.S. securities laws.

What is Kraken’s response?

Kraken denies the allegations, and its co-founder Jesse Powell took to Twitter/X to air his thoughts:

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