Another major crypto-trading platform, Kraken, is facing enforcement action from the U.S. Securities and Exchange Commission (SEC). The U.S. regulator is alleging the platform violated securities rules by operating as an unregistered exchange, broker, dealer and clearing agency.
In a complaint filed in federal district court in San Francisco, the SEC charged the companies that comprise the Kraken platform — Payward Inc. and Payward Ventures Inc. — with violating the registration provisions of securities rules.
Specifically, the complaint alleged that Kraken provided the traditional services of an exchange, broker, dealer and clearing agency in the crypto sector without registering in any of those capacities.
“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,” the regulator said in a release.
The SEC’s complaint also alleged that Kraken co-mingled client assets and its own assets, including allegations that it used customer assets to pay its operational expenses.
“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. That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk,” said Gurbir Grewal, director of the SEC’s enforcement division, in a release.
“Kraken’s choice of unlawful profits over investor protection is one we see far too often in this space, and today we’re both holding Kraken accountable for its misconduct and sending a message to others to come into compliance,” he added.
The regulator is seeking injunctive relief, disgorgement of ill-gotten gains plus interest, and penalties against the companies.
The allegations have not been proven. The company said that it disagrees with the regulator’s position and pledged to “vigorously defend” itself in court.
“The complaint makes a technical argument: that Kraken’s business requires special securities licenses to operate because the digital assets we support are really ‘investment contracts’. This is incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy,” the company said.
Kraken argued that the theory that crypto assets amount to securities has already been rejected by U.S. courts, and it maintained that the SEC’s case “will fail, too, and for the same reasons.”
It also argued that there’s no regulatory framework for crypto firms to follow.
“The SEC has promulgated no rule describing how an order in a digital asset should be matched, no guidance on how a trade should be cleared, and articulated no standards for how to broker a digital asset transaction. The allegation is hollow; there is no such thing as an exchange, broker dealer, or clearing agency for investment contracts. The SEC is demanding compliance with a regime that doesn’t exist,” it said.
The company argued that Congressional lawmaking is the proper route to establishing a regulatory framework for the crypto sector rather than regulating through enforcement.
On the allegation of co-mingling corporate and client assets, the firm said, “The SEC cannot and does not allege that any customer funds are missing, or any loss has occurred. Nor does it allege that any loss will occur. The complaint itself concedes that this so-called ‘commingling’ is no more than Kraken spending fees it has already earned.”