The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against Kraken, one of the largest cryptocurrency exchanges globally with over 10 million clients. The SEC alleges Kraken has been illegally operating as an unregistered securities exchange since 2018.
By facilitating hundreds of millions of dollars worth of cryptocurrency purchases and sales for traders, the SEC argues that Kraken meets the definition of a securities exchange under federal laws, which require exchanges to register with the SEC. Registration aims to protect investors through regulatory oversight of accounting, recordkeeping, conflicts of interest, cybersecurity controls, and more.
However, Kraken has failed to register with the required disclosures about its operations and risks, according to the SEC complaint. At the same time, Kraken has earned substantial fees from crypto trading that should have been subject to regulations.
The SEC also alleges troubling practices by Kraken such as commingling client funds with its own operating accounts. Additionally, Kraken has reportedly used client assets and trading fees directly to cover company expenses in ways that raise conflicts of interest concerns around prioritizing clients.
Kraken stated it strongly disputes the SEC’s allegations and interpretations that cryptocurrencies and exchanges are subject to securities regulations. Kraken argues that only Congress has the authority to extend the scope of SEC power to crypto markets. It believes the SEC is overreaching dangerously into crypto policy instead of promoting financial innovation.
By suing Kraken to halt operations, the SEC risks severely damaging the growing cryptocurrency industry, Kraken claims. The exchange says its practices have not harmed clients and conform reasonably to existing regulations.
The lawsuit seeks injunctive relief, disgorgement of any illegal profits, and civil financial penalties against Kraken. This development reflects the SEC’s controversial strategy under Gary Gensler to assert crypto oversight by testing legal authority over major industry players.
