The U.S. Securities and Exchange Commission has launched its second lawsuit this year against Kraken, a leading cryptocurrency exchange, alleging unregistered operations and confusion of customer assets.
This article delves into the details of the lawsuit, Kraken's firm response, and the broader implications for cryptocurrency regulation and investor protection.
With a backdrop of regulatory uncertainty and fierce debate, find out how Kraken plans to confront these allegations in court and the ongoing challenges facing the crypto industry.
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SEC Alleges 'Unregistered Operations & Confusion of Customer Assets'
On November 20, 2023, it was revealed that the U.S. Securities and Exchange Commission (SEC) has filed a lawsuit against "Payward Inc.", the operator of the cryptocurrency exchange "Kraken."
The SEC asserts that Kraken has been operating as an exchange, broker, dealer, and clearing agency without registering with the SEC.
Furthermore, the SEC has accused Kraken of mixing customer assets with its own, thus creating a significant risk of loss.
Additionally, the SEC claims that Kraken allowed trading in multiple digital asset securities, listing the following 16 cryptocurrencies as examples:
- ADA
- AXS
- ALGO
- ATOM
- CHZ
- COTI
- DASH
- FIL
- FLOW
- ICP
- MANA
- MATIC
- NEAR
- OMG
- SAND
- SOL
Gurbir Grewal, Director of the SEC's Enforcement Division, alleges that "Instead of complying with securities laws, Kraken chose to make decisions that resulted in hundreds of millions of dollars in profits, giving rise to a conflict-ridden business model that put investors' funds at risk."
The SEC maintains that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and is seeking penalties, injunctive relief, and disgorgement.
Earlier this year, in February, the SEC had sued Kraken for offering staking services without registration. Kraken neither admitted nor denied the allegations but agreed to pay a $30 million fine and ceased offering staking services to U.S. customers.
Kraken's Stance in Court Against the SEC
In an official statement on November 20, 2023, Kraken rebutted the SEC's claims, stating, "We disagree with the SEC's allegations and will confront them in court, continuing to offer our services without interruption."
Regarding the classification of cryptocurrencies as securities and the requirement for registration, Kraken counterargued that this is legally and factually incorrect.
They referred to a lawsuit involving the digital asset XRP, where XRP was not recognized as a security, suggesting that Kraken might prevail for similar reasons.
Kraken also countered the allegation of mixing customer and company assets by pointing out that "the SEC has not claimed any loss or misplacement of customer assets," highlighting the lack of evidence for any wrongful handling of customer funds.
Furthermore, Kraken criticized the SEC for not publishing appropriate guidelines for cryptocurrency regulations, arguing that the SEC is demanding compliance with a non-existent system.
The SEC has a history of suing cryptocurrency-related companies. However, in the U.S., there is a lack of clear rules and guidelines for cryptocurrency companies to follow.
This ambiguity has led to criticism of the SEC's approach of "regulation by enforcement." On November 9, a budget amendment bill to protect the cryptocurrency industry from the SEC's excessive crackdown passed the House without opposition. U.S.
Representative Tom Emmer, a cryptocurrency advocate, criticized SEC Chairman Gary Gensler as "incompetent and useless."
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U.S. House Passes Bill to Shield Crypto Industry from SEC Overreach
The U.S. House passes a landmark bill to protect the crypto industry from SEC overreach, challenging the SEC's enforcement approach and advocating for clearer regulations. Learn how this bipartisan effort aims to balance innovation and regulation.
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