Kraken Lawsuit: Breaking Down the Story of SEC vs. Kraken

Kraken Lawsuit: Breaking Down the Story of SEC vs. Kraken

Crypto exchanges have always been hotbeds of controversies and magnets to attract challenges for themselves.

Another day and another lawsuit by the SEC against a new crypto exchange with the same old allegations. After Coinbase and Binance, this time, the unfortunate crypto exchange is Kraken. The latest allegations against Kraken sparked rage in the crypto community as it is deemed unjustified without clear regulatory guidelines for crypto innovation and exchanges.

This article will delve into the full story behind the SEC’s charges against Kraken, explaining its potential impact on the market and moments where crypto innovation can find a clear picture of regulations. So, let’s begin. 

What Are SEC’s Charges Against Kraken?

The Securities and Exchange Commission (SEC) charged Kraken with operating its crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency. The same charges were also filed against Payward Inc. and Payward Ventures Inc.

Since at least September 2018, The SEC alleges that Kraken facilitated the buying and selling of crypto asset securities, failing to register these functions as required by law. This act is unlawful. The charges include violating the registration provisions of the Securities Exchange Act of 1934. 

The lawsuit seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties. 

Earlier in February of the same year, Kraken had agreed to cease certain activities and pay a $30 million civil penalty. The SEC’s complaint emphasizes Kraken’s alleged business practices, deficient internal controls, and poor recordkeeping, presenting risks for customers, including the commingling of funds and crypto assets.

In the official PR, the SEC states, “Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.”

Kraken Allegedly Uses Customer’s Funds Without Their Consent

According to the SEC’s complaint, Kraken is allegedly commingling its customers’ money with its own without their consent. The complaint states that Kraken commingles customers’ funds with its own. It includes paying operational expenses directly from accounts that hold customer cash. 

The SEC contends that such practices, including the use of customer funds for operational expenses, are part of a business model that places investors’ funds at risk and is in violation of securities laws. For example, the bankrupt crypto exchange FTX used money from its customers to purchase all of its shares held by a rival exchange called Binance. Later on, this business model messed up and drowned billions of dollars of customers’ funds. 

Plaintiff: Security and Exchange Commission (SEC)
Defendants: Kraken (Payward Inc. and Payward Ventures Inc)

Kraken’s Response On Lawsuit 

In response to the SEC’s complaint, Kraken refuted its allegations. Kraken also disclosed its plans to “vigorously” defend itself in court, emphasizing that today’s news doesn’t affect the services it provides. 

Furthermore, Kraken challenges the SEC’s complaint, stating that it makes a technical argument about the need for special securities licenses, which Kraken opposes as incorrect, false, and disastrous. Kraken refers to a previous case where a court rejected the SEC’s similar theory about digital assets.

The SEC accuses Kraken of “commingling” funds but Kraken clarifies that no customer funds are missing, and the SEC doesn’t allege any losses. Kraken argues that the SEC’s demand for compliance is based on a “regime that doesn’t exist”.

Kraken points to bipartisan legislation in Congress aiming to establish clear frameworks for centralized trading platforms. The company criticizes the SEC’s “regulation via enforcement” approach and suggests that congressional action is the right path to create new laws for crypto trading platforms.

Kraken highlights its global presence, regulatory compliance, and advocacy for effective rules for digital assets. The company stresses its commitment to strong consumer protections and anti-money laundering practices.

Despite the legal challenges, Kraken remains focused on its mission to accelerate cryptocurrency adoption. The company reassures clients that today’s news won’t interrupt its services, and it remains dedicated to providing a secure and inclusive environment for cryptocurrency users.

Kraken’s Founder Says The SEC Is Back For More Extortion 

Jesse Powell, who leads Kraken, is not happy about the SEC’s lawsuit. He’s saying it’s like the U.S. government is attacking the crypto world again. Powell mentions a $30 million deal they had in February, thinking that settled things. But now, the SEC is back for more?

Powell’s main point is that it seems like paying $30 million only gives you a short break before the SEC comes knocking again. He talks about how lawyers can do a lot with $30 million, but fighting the SEC could cost way more, around $100 million or more, and take a lot of time. Basically, if you can’t afford it, Powell is suggesting it might be better for crypto companies to avoid the regulatory challenges in the U.S.

Also Read: SEC vs Ripple Lawsuit: Ripple Marks Significant Win

Senator Cynthia Lummis’s Decisive Statement on the Kraken Lawsuit

In a recent statement, Senator Cynthia Lummis criticized the Securities and Exchange Commission (SEC) for what she sees as an overreliance on enforcement actions in the crypto space. 

According to the senator, crypto companies seeking guidance on crypto regulations from the SEC have faced unexpected enforcement actions instead, resulting in harm to consumers.

Senator Lummis is urging Congress to take decisive action by introducing a regulatory framework that provides guidelines to the SEC regarding the classification of assets as securities or commodities. She argues that such clear rules are essential for fostering a healthy environment for financial innovation in the rapidly evolving cryptocurrency landscape.

One notable legislative initiative in this direction is the Lummis-Gillibrand Responsible Financial Innovation Act. According to Senator Lummis, this proposed legislation aims to rein in the SEC. It will bring a more balanced approach to regulation. The senator believes that providing regulatory clarity will not only protect consumers but also enable the growth of financial innovation within the United States.

As discussions around crypto regulation continue to gain momentum, Senator Lummis’ advocacy for a more structured and transparent regulatory framework underscores the need for thoughtful consideration of the evolving crypto landscape by lawmakers. The Lummis-Gillibrand Act, if enacted, could mark a significant step toward achieving this balance.

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