It was, perhaps, inevitable. After the US.. Securities and Exchange Commission (SEC) came for the world’s first- and second-most active cryptocurrency exchanges – Binance and Coinbase – Kraken’s position in third place made it a logical target for the regulator’s next lawsuit.
Drawing from what has become its established playbook, on Monday, November 20, the SEC charged Kraken owner Payward with operating the platform as an unregistered securities exchange. But as it did with Binance, the commission also sprinkled in some more incendiary allegations to really bring home its point.
On the primary charge of operating an illegal securities exchange, the SEC’s lawsuit against Kraken represents the latest chapter in an ongoing crackdown. According to the regulator’s view that most cryptocurrencies are securities, all crypto exchanges that serve US customers are breaking the law.
The SEC’s central complaint represents a continued commitment to its interpretation of US securities law, which has seen it designate nearly all major altcoins as securities.
Critics have pointed out that although the SEC claims most cryptocurrencies fall under its jurisdiction, there is no viable pathway for exchanges to register their business with the agency. As Kraken CEO David Ripley argued, the SEC’s charges of non-compliance are weakened by its failure to offer crypto exchanges an alternative.
Moreover, since making the same accusation against Binance and Coinbase in June, the agency’s claim to dominion over the US crypto sector has suffered a major setback courtesy of a potentially game-changing court decision in the case of SEC vs. Ripple Labs.
After ruling that XRP sales on exchanges don’t count as securities transactions, Judge Analisa Torres handed the US crypto sector a significant victory. If it withstands any potential appeals, the ruling could set a crucial precedent, undermining the legal basis for the SEC’s charges against Kraken and other exchanges.
While the legal argument supporting the SEC’s crypto crackdown risks collapsing if Ripple’s court victory is upheld, the regulator’s complaints against exchanges extend beyond its assertation that cryptocurrencies are subject to securities law.
In its latest lawsuit, the Commission also accused Kraken of co-mingling customers’ money with its own, “including paying operational expenses directly from accounts that hold customer cash.” It made a similar allegation with regard to crypto assets, a charge that could set alarm bells ringing in the post-FTX era.
After all, the SEC’s position on the legal status of cryptocurrencies has been broadly rebuked by the industry. But charges of fraud or the mishandling of customer funds are of serious concern to investors.
For its part, Kraken has denied any wrongdoing and said it intends to defend its position in court.
“The SEC cannot and does not allege that any customer funds are missing, or any loss has occurred,” the company stated in response to the charges against it. Moreover, it added that the “so-called ‘commingling’ is no more than Kraken spending fees it has already earned.”