SEC sues Kraken for operating an unregistered exchange with user funds

By: Michael Wilson

SEC sues Kraken for operating an unregistered exchange with user funds

November 21, 2023 8:16 AM

The SEC alleged that Kraken operated as an unlicensed "exchange," "broker," and "clearing agency" and that it pooled consumer funds with its own.

The US Securities and Exchange Commission has filed a complaint against Kraken, accusing the company of embezzling client cash and failing to register as a clearing agency, broker, dealer, and securities exchange.

Kraken has been offering an illegal marketplace for the purchase and sale of cryptocurrencies since at least 2018, according to a complaint the SEC filed on November 20 in federal court in San Francisco.

According to a Kraken spokeswoman, the company disagrees with the SEC's charge and intends to defend its position in court.


In this case, Gary Gensler's office is making yet another attempt to regulate cryptocurrencies by arguing that they are securities contracts under US law.

"Without being registered with the SEC in any form, Kraken has continuously functioned as a broker-dealer, exchange, and clearing agency concerning the referenced crypto asset securities."

The SEC also claimed that Kraken misappropriated up to $33 billion in consumer funds due to its "deficient" internal controls and business practices. According to the SEC, this puts customers at "substantial risk of loss."

According to the complaint, Kraken paid for operational expenditures straight from user assets, citing the exchange's independent auditor. 

According to SEC enforcement section director Gurbir Grewal, "our accusation is that Kraken chose to profit from investors by hundreds of millions of dollars rather than adhering to securities laws." "That choice resulted in a conflict-ridden business model that risked customer's capital."

In response to the SEC's accusations, Kraken said that it has never before listed any securities that were not in compliance with securities laws.

"We defend our position, which is that we don't list securities, disagree with the SEC's claim towards Kraken, and are willing to vigorously defend it."

"It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation, and undermines U.S. competitive advantages globally," according to a spokesperson for the agency. 

Kraken responded to the SEC's commingling claims in a blog post on November 20 by saying, "No more than Kraken spending fees it has already earned," adding that the SEC has not suggested that any user funds are missing.

Among the 16 cryptocurrencies the SEC listed as securities in the case were Cardano (ADA), Algorand (ALGO), Polygon (MATIC), and Solano (SOL). 


SEC's Kraken complaint identifies 16 cryptocurrencies as securities.

Source: CourtListener

The SEC claims in its case that Kraken broke the law by failing to register under the 1934 Securities Exchange Act. It is asking the court to order Kraken to pay restitution, issue an injunction, and return any "ill-gotten gains."

Similar claims were made in lawsuits filed in June against Coinbase and Binance, alleging that Kraken also acted as an unauthorized broker for crypto assets.

On February 9, Kraken settled with the SEC for $30 million and agreed to cease offering crypto-staking products and services to customers in the United States.