SEC Charges Kraken for Operating as an Unregistered Securities Exchange, Broker, Dealer, and Clearing Agency
FOR IMMEDIATE RELEASE
Washington D.C., Nov. 20, 2023 —
The Securities and Exchange Commission today charged Payward Inc. and Payward Ventures Inc., together known as Kraken, with operating Kraken’s crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.
According to the SEC’s complaint, since at least September 2018, Kraken has made hundreds of millions of dollars unlawfully facilitating the buying and selling of crypto asset securities. The SEC alleges that Kraken intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law. Kraken’s alleged failure to register these functions has deprived investors of significant protections, including inspection by the SEC, recordkeeping requirements, and safeguards against conflicts of interest, among others.
Through its platform’s services, Kraken allegedly:
- Provides a marketplace that brings together the orders for securities of multiple buyers and sellers using established, non-discretionary methods under which such orders interact, and thus operates as an exchange;
- Engages in the business of effecting securities transactions for the accounts of Kraken customers, and thus operates as a broker;
- Engages in the business of buying and selling securities for its own account without an applicable exception, and thus operates as a dealer; and
- Serves as an intermediary in settling transactions in crypto asset securities by Kraken customers, and acts as a securities depository, and thus operates as a clearing agency.
The SEC’s complaint also alleges that Kraken’s business practices, deficient internal controls, and poor recordkeeping practices present a range of risks for its customers. As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash. Kraken also allegedly commingles its customers’ crypto assets with its own, creating what its own auditor had identified as “a significant risk of loss” to its customers.
“We allege that Kraken made a business decision to reap hundreds of millions of dollars from investors rather than coming into compliance with the securities laws. That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “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’s complaint, filed in federal district court in San Francisco, alleges that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties.
In February of this year, Kraken agreed to cease offering or selling securities through crypto asset staking services or staking programs and pay a civil penalty of $30 million.
The SEC’s investigation was conducted by Elizabeth Goody and Jennie B. Krasner of the Division of Enforcement’s Crypto Assets and Cyber Unit and Peter Moores of the Boston Regional Office with the assistance of Sachin Verma and Pasha Salimi. It was supervised by Paul Kim, Jorge Tenreiro, and David Hirsch of the Crypto Assets and Cyber Unit. The SEC’s litigation will be led by Alec Johnson, Daniel Blau, and Mr. Moores under the supervision of Douglas Miller, Olivia Choe, and Mr. Tenreiro.