Nov 20 (Reuters) – Kraken, one of the world’s largest cryptocurrency exchanges, was sued on Monday by the U.S. Securities and Exchange Commission, which accused it of operating illegally as a securities exchange without first registering with the regulator.
The lawsuit in San Francisco federal court is the latest step in SEC Chairman Gary Gensler’s push to bring cryptocurrency under his agency’s purview, asserting that digital assets are investment contracts subject to federal securities laws.
Kraken intends to defend itself, saying Congress should decide how to regulate cryptocurrency exchanges and calling the SEC’s view of digital assets “incorrect in law, wrong in fact, and disastrous in terms of policy.”
The San Francisco-based exchange also said the lawsuit would not affect its more than 10 million customers.
In June, the SEC filed similar lawsuits against Binance, the world’s largest cryptocurrency exchange, and Coinbase, the largest in the United States. Both defend themselves against the regulator’s assertions.
The SEC said Payward Inc and Payward Ventures Inc, which operates as Kraken, have made hundreds of millions of dollars since 2018 by arranging crypto purchases and sales while turning a blind eye to securities laws securities designed to protect investors.
Kraken has also been accused of having poor internal controls and inadequate record-keeping, reflected in part by it mixing customer money with its own and paying operating costs directly from customer accounts.
Failure to register has “resulted in a business model riddled with conflicts of interest that puts investors’ funds at risk,” SEC Enforcement Officer Gurbir Grewal said in a statement. “The Kraken’s choice to make illegal profits rather than protect investors is a choice we see far too often in this area.”
In its statement, Kraken said the SEC’s complaint conceded that any alleged “mixing” represented “no more than Kraken’s spending fees that it has already earned.”
The SEC also accused Binance of commingling customer funds, following a Reuters report describing such conduct. Binance has denied the mixed accusations.
Monday’s lawsuit seeks a civil penalty, restitution of ill-gotten gains and stopping the operation of an exchange without registration.
Kraken was founded in 2011. It is backed by investors such as Blockchain Capital, Digital Currency Group, Hummingbird Ventures, SkyBridge and Tribe Capital.
The case is SEC v. Payward Inc et al, US District Court, Northern District of California, No. 23-06003.
Reporting by Jonathan Stempel in New York; Additional reporting by Chris Prentice; Editing by David Gregorio, Stephen Coates and Chris Reese
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