Kraken Faces Legal Battle in Crypto Exchange Crackdown

Kraken has found itself at the center of a legal battle with the U.S. SEC

Kraken, a global cryptocurrency exchange, has found itself at the center of a legal battle with the U.S. Securities and Exchange Commission (SEC). The regulatory body filed a lawsuit on Monday in a San Francisco federal court, alleging that Kraken illegally operated as a securities exchange without obtaining prior registration. This move is part of SEC Chair Gary Gensler's broader initiative to assert regulatory control over the cryptocurrency space, asserting that digital assets should be considered investment contracts subject to federal securities laws.

Kraken has asserted its intention to vigorously defend against the SEC's allegations, contending that the regulation of cryptocurrency exchanges should be determined by Congress. The exchange argues that the SEC's perspective on digital assets is "incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy." Kraken has also emphasized that the lawsuit is not expected to impact its vast client base, which exceeds 10 million users. Notably, in June, the SEC initiated similar legal actions against Binance, the world's largest cryptocurrency exchange, and Coinbase, the largest in the United States. Both exchanges are currently contesting the SEC's claims.

The SEC's lawsuit specifically targets Payward Inc and Payward Ventures Inc, the entities operating as Kraken. According to the regulatory body, since 2018, Kraken has facilitated hundreds of millions of dollars in cryptocurrency transactions without adhering to securities laws designed to protect investors. The SEC alleges that Kraken turned a "blind eye" to these laws, exposing investors' funds to risks. The exchange is further accused of maintaining deficient internal controls and inadequate record-keeping practices. This was evident, in part, through the commingling of customer funds with the exchange's own funds and the direct payment of operating costs from customer accounts.

Gurbir Grewal, the SEC's enforcement chief, highlighted the conflicts of interest and the potential risk to investors resulting from Kraken's failure to register. He stated, "Kraken's choice of unlawful profits over investor protection is one we see far too often in this space." In response, Kraken issued a statement asserting that any alleged "commingling" amounted to nothing more than the exchange spending fees it had already earned.

The SEC's legal action against Kraken echoes a similar accusation made against Binance, as reported by Reuters. The SEC alleges that both exchanges engaged in the commingling of customer funds, a practice that Binance vehemently denies. The lawsuit filed on Monday seeks various remedies, including a civil fine, disgorgement of ill-gotten gains, and an injunction to prevent Kraken from continuing to operate as an exchange without proper registration.

As the legal proceedings unfold, the outcome will not only impact Kraken but may also set precedents for how regulatory bodies globally approach the oversight of cryptocurrency exchanges. The clash between the cryptocurrency industry and regulatory authorities continues, with each side vying for control and influence in this rapidly evolving financial landscape.