Kraken Accused by SEC of Operating Unregistered Platform, Improperly Mixing Customer Funds

Crypto exchange Kraken commingled customer and corporate funds while operating as an unregistered broker, clearing agency and dealer, the U.S. Securities and Exchange Commission (SEC) alleged in a new lawsuit Monday.

The federal regulator claimed that the San Francisco-based company violated federal securities laws in a repeat of its suits against other crypto trading platforms. Unique to Monday's lawsuit are claims that Kraken created a "significant risk" by commingling up to $33 billion in customer crypto with its own corporate assets, the regulator said, quoting Kraken's independent auditor.

"Similarly, Kraken has held at times more than $5 billion worth of its customers' cash, and it also commingles some of its customers' cash with some of its own," the suit said. "In fact, Kraken has at times paid operational expenses directly from bank accounts that hold customer cash."

The SEC claims that Kraken simultaneously operates an unregistered broker, clearinghouse and exchange echoes its complaints against Binance and Coinbase, two exchanges the agency sued earlier this year.

Those suits are continuing. The SEC previously settled similar allegations against Bittrex's now-shuttered U.S. wing.

The federal regulator, as it has with those previous suits, listed a number of tokens it deemed to be unregistered securities, including the Algorand token (ALGO), Polygon's MATIC and NEAR. According to the suit, Kraken took a direct role in promoting these tokens to the investing public.

The SEC filing asks to permanently ban Kraken from operating as an unregistered exchange. The agency says it's also pursuing a fine and for Kraken to give back ill-gotten gains.

"We disagree with the SEC's complaint against Kraken, stand firm in our view that we do not list securities and plan to vigorously defend our position," Kraken said in a statement. "The SEC has repeatedly challenged crypto exchanges to come in and register without a single law supporting their position and no clear path to registration. And despite opposition from lawmakers, the SEC continues to pursue legal action against these crypto exchanges. For years, we have advocated for effective U.S. market regulation that addresses the unique risks and benefits which crypto presents to all individuals. We believe Congressional action is the most appropriate path to resolving the lack of regulatory clarity in the U.S. It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation and damages U.S. competitiveness globally."

The exchange also published a blog post outlining its position.

The regulator settled charges tied to Kraken's staking services earlier this year.

UPDATE (Nov. 20, 2023, 23:05 UTC): Adds additional detail and links.

UPDATE (Nov. 21, 2023, 00:29 UTC): Adds a statement from Kraken.