The Kraken digital asset exchange has been charged with selling unregistered securities, prompting the question: how long before Kraken and its U.S. rival Coinbase (NASDAQ: COIN) are forced to either radically alter their business model or exit the U.S. market?

On Monday, the U.S. Securities and Exchange Commission (SEC) filed a complaint in the U.S. District Court in the Northern District of California accusing Kraken’s parent companies Payward Inc. and Payward Ventures Inc. of operating an unregistered securities exchange, broker, dealer, and clearing agency. The complaint says Kraken made “hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities.”

In addition to failing to properly register with the SEC, Kraken allegedly put customer assets at risk via its “business practices, deficient internal controls, and poor recordkeeping practices.” These included commingling customer cash with operational funds, leading to Kraken “paying operational expenses directly from accounts that hold customer cash.” Kraken also allegedly commingled customers’ digital assets with the exchange’s assets, which even Kraken’s own auditor identified as “a significant risk” to customers.

Kraken appears to be closing out 2023 much in the way it started the year. In February, Kraken paid a $30 million penalty and closed its U.S. token-staking business rather than fight the SEC in court. Not long after, the SEC filed a civil complaint against Coinbase for selling unregistered securities, which remains an ongoing matter before the courts.

The idea that the SEC may be prepping additional actions against other players in this sector got a boost from Gurbir Grewal, director of the SEC’s Division of Enforcement. Grewal said Monday that 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.”

The SEC wants Kraken to pay unspecified injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties. But after rolling over without a fight in February, Kraken says this time it intends to “vigorously defend our position in court” against the current charges.

Kraken issued a statement slamming the complaint for alleging “no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty.” The SEC’s complaint was limited to “a technical argument” that certain tokens are ‘investment contracts,’ an argument that Kraken called “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.” Kraken added that it remains “fully committed to our U.S. and global clients and partners.”

This is Howey do it

The complaint notes that Kraken offers trades in numerous tokens that the SEC has previously flagged as “crypto asset securities” in other civil actions (Binance, Bittrex, Coinbase, etc.). These tokens include ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND and SOL. However, the charges in the complaint specifically relate to Kraken’s offering of ADA, ALGO, ATOM, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG and SOL.

The SEC claims that “a reasonable investor” would have concluded from the public statements of the issuers and promoters of the above tokens—“at least some of which were rebroadcast by Kraken itself”—that the offer and sale of these tokens amounted to investment contracts as defined by the Howey test.

Furthermore, a reasonable investor would have concluded from these issuers/promoters’ statements that the future profits through the increased value of the tokens cited above “would come through the efforts of these issuers and promoters,” ticking another box on the Howey chart.

Multiple issuers were also selling their own tokens on the exchange via market makers, but “Kraken did not inquire or query whether a market maker was selling crypto assets on behalf of an issuer.”

Kraken failed to register with the SEC, despite Kraken itself using terms from securities laws and the securities industry to promote itself as an ‘exchange.’ Kraken similarly describes itself as a ‘broker’ in internal documents, including referring to customer accounts as ‘brokerage’ accounts.

While acting as an exchange, broker-dealer and clearing agency, Kraken failed to separate these competing functions of its business, as would be mandatory in more traditional areas of the securities industry. This is intended to minimize conflicts between the interests of securities intermediaries and rank-and-file investors.

Material clenching of sphincters

Perhaps the complaint’s most troubling allegations deal with Kraken’s failure to strictly segregate corporate assets from those belonging to their customers. In Kraken’s audit plan for 2022, its independent auditor stated there was “a significant risk of loss of custodial (and proprietary) digital assets through theft/loss of public keys or improper controls over accounting for custodial digital assets that are comingled between customers and with the Company’s proprietary digital assets.”

Kraken holds separate corporate and customer bank accounts but its own financial statement for 2020 shows that $30.8 million worth of customer cash appeared to be in Kraken’s operating account. The 2021 statement showed this number rising to $33.6 million.

Kraken also “treats some fiat in custodial accounts as its own—and not the customers’—supposedly because Kraken’s customers owe Kraken fees arising from the customers’ trading.” This means Kraken “has at times paid operational expenses using funds held in customer custodial accounts.”

Kraken’s auditor also flagged “multiple control deficiencies” in Kraken’s 2021 financial statements, with Kraken’s board being informed of a “significant” deficiency in the company’s internal controls.

In 2023, Kraken uncovered “errors relating to customer custodial cash and crypto assets” that were blamed on “Kraken’s poor recordkeeping practices and failure to properly record margin transactions.” Kraken also failed to “establish a sub-ledger before offering its margin lending product,” and Kraken’s auditor determined these errors to be “material to the 2020 and 2021 financial statements.”

Americoin exceptionalism

As detailed in the complaint, the scale of Kraken’s fiscal discrepancies appears a far cry from that of some of the more notable implosions of ‘crypto’ crooks in recent years. That said, the SEC doesn’t appear to be in a mood to grade operators on a curve or to wait until these discrepancies reach critical mass.

The SEC is capping off a banner year for digital asset enforcement actions but it’s clear that some ‘crypto’ luminaries still refuse to accept that existing securities laws are perfectly applicable to their operations.

Kraken co-founder/ex-CEO Jesse Powell has so far said zip about the SEC’s latest broadside, a notable change from the stream of anti-SEC invective he unleashed following February’s $30 million settlement. If Powell, who once admitted to employing “the arts of a money launderer” to get around banking restrictions, can learn to keep his mouth shut, perhaps there’s hope for this sector after all.

Just kidding. Dave Ripley, who replaced Powell as CEO last year, tweeted that the SEC was urging Kraken to “come in and register” despite Ripley’s belief that there is “no clear path to registration.” In reality, there is a well-traveled superhighway to registration, but it would require Kraken to conform to securities laws (aka delist all the shitcoins). Since that would cut into Kraken’s profits, it can’t/won’t take this route. So here we are.

America’s ‘crypto’ cowboys appear to be trying to hang on until January 2025, when Trump could be back in the White House with the ability to remove SEC chairman Gary Gensler and install someone more ‘crypto-friendly.’ (Perhaps Elon Musk will be available after he crashes the next SpaceX Starship rocket into Twitter/X headquarters.)

We’ll close by noting that the SEC chose to file its latest complaint not long after Kraken was publicly outed as a conduit for major holders of the Tether (USDT) stablecoin looking to convert those unbacked tokens into actual cash. With Tether being named and shamed by members of Congress as the token most favored by terror groups, Coinbase’s recent revelation that USDT accounted for over 15% of its trading volume could bring a new filing any day now—only this one from the Department of Justice.

Crypto bros should get their eyes checked—and soon. It’s one thing being unable to see the path to registration. But to not see the road to ruin rising up to meet them?

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance,, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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