Kraken charged with operating as an unregistered securities exchange

The US Securities and Exchange Commission has charged crypto exchange Kraken with operating as an unregistered securities exchange.

Specifically, the Securities and Exchange Commission acted against Payward Inc. and Payward Ventures Inc., collectively known as Kraken, for allegedly operating Kraken’s cryptocurrency trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. 

The SEC contends that since at least September 2018, Kraken has facilitated the buying and selling of crypto asset securities, generating substantial revenue without complying with the necessary registrations. The complaint asserts that Kraken combines the roles of an exchange, broker, dealer, and clearing agency without registering any of these functions with the SEC, depriving investors of regulatory protections such as SEC inspection, recordkeeping obligations, and safeguards against conflicts of interest. 

Kraken's alleged failure to register these functions is claimed to have exposed investors to various risks. The SEC highlights concerns about Kraken mixing customer funds with its own, including using customer cash for operational expenses. Additionally, Kraken is accused of combining customers' crypto assets with its own, posing a significant risk of loss to customers. 

Representatives from the SEC Division of Enforcement asserted that Kraken prioritised unlawful profits over compliance with securities laws, resulting in a business model with conflicts of interest that jeopardized investors' funds. The SEC's complaint, filed in federal district court in San Francisco, alleges violations of the registration provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains with interest, and penalties.

Kraken’s previous run-ins with the SEC

It's worth noting that, in February 2023, Kraken agreed to cease offering securities through crypto asset staking services or staking programs and pay a USD 30 million civil penalty. The SEC revealed in a statement that the firm had failed to register the offer and sale of its crypto asset staking-as-a-service program, which has led to the fine. 

This wasn’t the first time Kraken had come under fire. In November 2022, the company had to pay the US Treasury Department’s Office of Foreign Assets Control USD 362,158 for apparent violations of sanctions against Iran. At the time, Kraken officials revealed that the matter was voluntarily self-reported and corrected in a timely manner. 

This latest SEC investigation involved the Division of Enforcement’s Crypto Assets and Cyber Unit and the Boston Regional Office, supervised by the Crypto Assets and Cyber Unit.