The U.S. Securities and Exchange Commission (SEC) has charged Payward Inc. and Payward Ventures Inc., d/b/a Kraken, with operating an unregistered securities exchange, broker, dealer, and clearing agency. This latest action by the SEC aligns with similar complaints filed against industry giants Binance and Coinbase, intensifying concerns that such regulatory measures may significantly challenge the crypto scene in the U.S.
The Case Against Kraken
According to the SEC’s complaint, since at least September 2018, Kraken has been accused of unlawfully facilitating the buying and selling of crypto asset securities, generating hundreds of millions of dollars in the process. The SEC alleges that Kraken has integrated the traditional roles of an exchange, broker, dealer, and clearing agency, all without proper registration with the Commission. This oversight has reportedly deprived investors of critical protections such as SEC inspections, recordkeeping requirements, and conflict of interest safeguards.
Specifically, the SEC’s allegations against Kraken include:
- Operating as an exchange by providing a marketplace that consolidates multiple buyers’ and sellers’ orders.
- Functioning as a broker by managing securities transactions for Kraken customers.
- Acting as a dealer by trading securities for its own account without an exemption.
- Serving as a clearing agency by intermediating in settling crypto asset securities transactions and acting as a securities depository.
Alleged Risks and Misconduct
The complaint also points to Kraken‘s business practices, inadequate internal controls, and poor recordkeeping, highlighting a range of risks for its customers. Notably, it accuses Kraken of commingling customer funds with its own and using customer accounts to cover operational expenses. Furthermore, the SEC alleges that Kraken mixes its customers’ crypto assets with its own, which its auditor identified as a significant risk of loss to customers.
Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, criticized Kraken’s choice of unlawful profits over investor protection, stating, “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.”
Legal and Financial Repercussions
Filed in federal district court in San Francisco, the SEC’s complaint seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains with interest, and penalties against Kraken. Earlier this year, in February, Kraken agreed to a $30 million civil penalty and ceased offering or selling securities through crypto asset staking services or programs.
A Broader Regulatory Pattern
This case against Kraken adds to a growing pattern of SEC actions targeting major players in the cryptocurrency industry. With similar complaints against Binance and Coinbase, there is a growing perception that the SEC’s regulatory approach may pose a significant threat to the viability and growth of the crypto industry in the U.S. The SEC’s aggressive stance raises critical questions about the future of cryptocurrency exchanges and the broader digital asset market in the United States.
