Next battlefield? SEC sues Kraken exchange and Kraken's full response
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Next battlefield? SEC sues Kraken exchange and Kraken's full response
"We disagree with the SEC's position, and the law is on our side."
Navigating Web3 tides with focused insightsBy: Wu Shuo Editorial Team
The U.S. Securities and Exchange Commission (SEC) has charged Payward Inc. and Payward Ventures Inc. (collectively known as Kraken) for operating Kraken’s cryptocurrency trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.
According to the SEC's complaint, since September 2018, Kraken has earned hundreds of millions of dollars by unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Kraken interwove traditional exchange, brokerage, dealer, and clearing agency services without registering these functions with the Commission as required by law. By failing to register, investors were deprived of key protections such as SEC examinations, recordkeeping requirements, and safeguards against conflicts of interest.
The platform allegedly provided the following functions through its services:
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Offering a marketplace that brings together multiple buyers’ and sellers’ orders for securities via established, non-discretionary methods so that the orders interact—thus operating as an exchange;
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Engaging in the business of effecting securities transactions in customer accounts—thus operating as a broker;
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Engaging in the business of buying and selling securities for its own account without qualifying for any exemption—thus operating as a dealer;
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Acting as an intermediary in executing customers’ crypto asset securities transactions and serving as a custodian of securities—thus operating as a clearing agency.
The SEC’s complaint further alleges that Kraken’s business practices, inadequate internal controls, and poor recordkeeping exposed its customers to a range of risks. According to the complaint, Kraken commingled customer funds with its own, including directly paying operational expenses from accounts holding customer cash. Kraken also allegedly commingled customers’ crypto assets with its own, which its own auditors reportedly viewed as posing a “significant risk of loss” to customers.
“We allege that Kraken chose to illegally earn hundreds of millions of dollars from investors rather than comply with securities laws. That decision led to a business model rife with conflicts of interest and put investor funds at risk,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “Kraken’s choice of illicit profits over investor protection is what we too often see in this space, and today we are holding Kraken accountable for its misconduct while sending a message to others to follow the rules.”
The SEC filed its complaint in the U.S. District Court for the Northern District of California, alleging that Kraken violated the registration provisions of the Securities Exchange Act of 1934. The Commission seeks permanent injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains with prejudgment interest, and civil penalties.
In February of this year, Kraken agreed to cease offering or selling securities through its crypto staking services or staking programs and paid a $30 million civil penalty.
The SEC’s investigation was conducted by Elizabeth Goodrich and Jenny B. Krasner of the Division of Enforcement’s Crypto Assets and Cyber Unit, along with Peter Mulheren of the Boston Regional Office, under the supervision of Sachin R. Verma and Pari J. Salimi. The investigation was overseen by Paul Kim, George Tannous, and David Hirsch of the Crypto Assets and Cyber Unit. The litigation will be led by Alec Johnson, Daniel Brau, and Mulheren under the supervision of Douglas M. Miller, Olivia Choe, and Tannous.
Kraken’s Response
The U.S. Securities and Exchange Commission (SEC) has filed a lawsuit alleging that Kraken operated as an unregistered securities exchange, broker, and clearing agency. We disagree with these claims and intend to vigorously defend our position in court. Today’s news does not affect the products we offer, and we will continue to serve our customers without interruption. Our commitment to our U.S. and global customers and partners remains unwavering.
The complaint against Kraken does not allege fraud, market manipulation, customer losses due to hacking or security breaches, or breach of fiduciary duties. While it references large sums of money, it does not claim that even a single dollar of those funds was lost or misused—no Ponzi schemes, no failure to maintain adequate reserves, and no failure to hold customer funds on a 1:1 basis. In fact, none of these conditions exist.
Instead, the complaint raises a technical argument: that Kraken’s business requires special securities licenses because the crypto assets we support are actually “investment contracts.” This is legally incorrect, factually wrong, and policy-wise disastrous.
We Disagree With the SEC—The Law Is On Our Side
The SEC has previously attempted this theory—but was directly rejected by a court. In that case, the SEC argued that crypto assets traded on platforms constituted securities transactions. However, the U.S. District Court for the Southern District of New York disagreed, ruling that the SEC failed entirely to meet the relevant legal test. The court found that the SEC’s unprecedented legal theory conflicted with the “economic realities” of these transactions. For the same reasons, the SEC’s case against Kraken will fail.
The SEC alleges that Kraken “commingled” its own funds with customer funds—a similar accusation previously made against other crypto platforms. The SEC cannot and does not allege that any customer funds were lost or that any losses occurred, nor does it suggest that losses will occur. The complaint itself acknowledges that the alleged “commingling” merely involved Kraken spending fees it had already earned.
The SEC holds the well-known view that crypto asset platforms like Kraken should simply “come and register.” As most securities law experts know, there is currently no legal basis supporting this position. The SEC has not created any rules describing how crypto asset orders should be matched, provided no guidance on how trades should be cleared, and set no standards for crypto asset trading. The allegation is hollow; there are no exchanges, broker-dealers, or clearing agencies for investment contracts. The SEC is demanding compliance with a regime that does not exist.
Congress Is Advancing Bipartisan Legislation
Meanwhile, bipartisan groups of lawmakers have questioned the SEC’s so-called “regulation by enforcement” approach. They have asked why the agency’s actions against crypto companies appear less focused on “compliance and customer protection” and more “orchestrated for maximum publicity and political impact.” Others have observed that the SEC’s strategy “does not protect the public.” In fact, this lawsuit does nothing to protect the public. Like previous complaints, its allegations are factually inaccurate, legally unsound, and represent the wrong way to make policy in America.
Bipartisan bills are advancing in both the House and Senate aimed at establishing a clear registration and regulatory framework for centralized trading platforms. Congressional action, enacted by elected legislators—not agency enforcement—is the proper path to establish new laws for centralized crypto platforms in the United States. As we continue to expand our global operations and diversify our product offerings, Kraken’s commitment to the U.S. market remains strong. We will continue to defend our spot market business in the U.S., our customers, and the community of crypto innovators.
While some critics may believe that crypto asset platforms do not want regulation at all, that is not our position. In fact, Kraken has operated for over a decade and holds registrations, licenses, authorizations, and approvals in multiple jurisdictions globally—including in the U.S., the UK, the EU, and Canada—across both developed and emerging markets. We have consistently advocated for practical, effective crypto asset regulations. Our May congressional testimony highlighted Kraken’s commitment to robust, harmonized consumer protection and anti-money laundering practices in the United States.
Since the company’s founding in 2011, we have worked tirelessly to ensure that U.S. consumers can safely access crypto asset technologies designed to create a fairer, more inclusive financial system. Comprehensive congressional action is the right way forward—and will prevent the U.S. from falling behind through litigation as crypto and Web3 advance globally.
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