The Securities and Exchange Commission filed a lawsuit Monday against cryptocurrency exchange Kraken for allegedly commingling billions of dollars in customer and corporate funds, and for allegedly operating an unregistered exchange, broker, dealer and clearing agency.
The lawsuit, filed in the Northern District of California, San Francisco Division, alleges that the exchange’s “business practices, deficient internal controls, and inadequate recordkeeping present a range of additional risks that would also be prohibited for any properly registered securities intermediary.”
At times holding more than $33 billion in customer assets, Kraken has commingled them with its own, “creating what its independent auditor had identified in its audit plan as ‘a significant risk of loss’ to its customers,” the lawsuit said.
“Similarly, Kraken has held at times more than $5 billion worth of its customers’ cash, and it also commingles some of its customers’ cash with some of its own. In fact, Kraken has at times paid operational expenses directly from bank accounts that hold customer cash,” it said.
The firm’s independent auditor determined this year that recordkeeping issues had resulted in “material errors” to its financial statements in 2020 and 2021, according to the lawsuit.
“We strongly disagree with the SEC claims, stand firm in our view that we do not list securities, and plan to vigorously defend our position,” said Kraken CEO David Ripley on Twitter Monday night.
“As we have seen before, the SEC argues that Kraken should ‘come in and register’ with the agency, when there is no clear path to registration. Its allegations are factually incorrect, contrary to law, and the wrong way to create policy in the United States,” Ripley tweeted, adding that Congressional action is the best path to regulatory clarity.
The firm also published a blog post defending itself against the allegations Monday night.
This is the second time Kraken’s found itself in the crosshairs of the SEC this year, after paying $30 million in February to settle allegations that it offered unregistered securities through its now-shuttered staking-as-a-service program.
Kraken founder and former CEO Jesse Powell took to Twitter as well, saying, “Message is clear: $30m buys you about 10 months before the SEC comes around to extort you again. Lawyers can do a lot with $30m but the SEC knows that a real fight will likely cost $100m+, and valuable time. If you can't afford it, get your crypto company out of the US warzone.”
This year, the regulator has brought several enforcement actions and lawsuits against crypto companies, accusing Coinbase and Binance separately in June of operating unregistered exchanges.
The SEC settled with Nexo for $45 million in January for failing to register a retail crypto product; and in August, Bittrex paid $24 million to settle allegations it operated an unregistered exchange. Both companies have left the U.S. market.
In its suit filed Monday, the SEC seeks to ban Kraken — permanently — from operating as an unregistered exchange, and also seeks to force Kraken to disgorge any “ill-gotten gains.”
Republican Wyoming Senator and member of the Senate Banking Committee Cynthia Lummis came out against the SEC Monday night, tweeting, “The SEC cannot continue ruling by enforcement. Crypto asset companies have repeatedly tried to get guidance from the SEC only to be hit with enforcement actions, causing unnecessary harm to consumers.”
Lummis and New York Senator Kirsten Gillibrand, a Democrat, reintroduced legislation in July to create a comprehensive regulatory framework for crypto assets. The duo had originally unveiled the bill last year.
