The Securities and Exchange Commission sued Kraken, one of the largest cryptocurrency exchanges, on Monday, alleging it had illegally operated without registering as a securities exchange—marking the latest step in the SEC’s push to regulate cryptocurrency.
The SEC said in a press release Kraken has illegally made “hundreds of millions of dollars” since 2018, and alleges it “has deprived investors of significant protections” by operating while unregistered.
The lawsuit argues many of the crypto assets that customers can trade on Kraken legally count as securities, meaning Kraken is required to register with the SEC—but instead, Kraken has simultaneously operated as a securities exchange, broker, dealer and clearing agency without registering with federal regulators.
Kraken is also accused of having deficient internal controls and poor recordkeeping practices that the SEC said “present a range of risks for its customers,” including “commingl(ing) its customers’ money with its own” and “paying operational expenses directly from accounts that hold customer cash.”
The lawsuit, which was filed in federal district court in San Francisco, asks a judge to prohibit Kraken from acting as an unlicensed exchange, and seeks “disgorgement of ill-gotten gains plus interest and penalties.”
Kraken said in a statement it plans to “vigorously defend our position in court.” The company argued courts have rejected a previous attempt by the SEC to count crypto assets as securities. “The complaint against Kraken alleges no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty,” the statement read.
This isn’t Kraken’s first issue with the SEC. In February, Kraken agreed to stop offering its staking services and to pay a penalty of $30 million as a settlement with the SEC.
The lawsuit against Kraken—which has the formal name of Payward Inc. and Payward Ventures Inc—is the latest SEC lawsuit targeting cryptocurrency exchanges as the agency works to regulate the crypto sector. SEC Chairman Gary Gensler has indicated for years that crypto would face tougher regulation, suggesting many cryptocurrencies other than bitcoin should be regulated under federal securities laws and arguing the market was full of “fraud, scams and abuse” due to the lack of investor protections. The crypto industry has pushed back against these efforts, arguing current securities laws aren’t compatible with cryptocurrency and accusing the SEC of being overly aggressive. This year, the SEC has also sued Binance, Coinbase and Beaxy. It filed suit against Binance in June, alleging that the company was operating an illegal exchange in the U.S. and misused customer funds. In March, the SEC charged Beaxy, another cryptocurrency trading platform, for failing to register as an exchange and alleging the founder misappropriated customer money—the exchange shut down over the SEC charges. Meanwhile, mega-exchange FTX collapsed last year and its founder Sam Bankman-Fried was found guilty of fraud earlier this month.