Kraken Co-Founder Slams SEC for Going “Back for Seconds”

• The SEC has filed a second enforcement action against Kraken.
• The latest enforcement action focuses on inadequate registration and risky internal processes.
• Some members of the community have condemned the SEC’s actions.

The Securities Exchange Commission (SEC) has been waging a fierce war against the cryptocurrency industry, taking an aggressive stance on the regulatory oversight of digital assets. However, the tide appeared to be turning recently with high-profile court losses for the SEC against Grayscale and Ripple, and the flood of recent Bitcoin and Ethereum ETF applications suggesting institutions reject the SEC’s restrictive crypto arguments.

Yet the securities watchdog is not backing down, as evidenced by new enforcement action against Kraken, a major cryptocurrency exchange. The latest SEC complaint alleges Kraken has been operating an unregistered exchange, while also running inadequate internal processes, including the comingling customers’ funds. 

SEC Back Again

According to the SEC, Kraken has operated an unregistered exchange for crypto securities offerings since 2018, profiting hundreds of millions of dollars by facilitating an unlawful marketplace matching buyers and sellers for its own benefit.

The complaint also cited Kraken’s “deficient internal controls” and “poor recordkeeping” posing risks to platform users. Namely, commingling customer funds to pay company expenses and comingling crypto assets in ways that an internal audit flagged as hazardous.

This latest enforcement action marks the second time the SEC has gone after Kraken this year. In February, the exchange settled charges related to offering staking services without proper registration by agreeing to pay a $30 million penalty and discontinuing its US crypto staking program. 

The injunction from the previous settlement has set the stage for this latest enforcement action over fresh allegations that Kraken has been illegally operating an unlicensed exchange, much to the anger of the crypto community.

The crypto community has rallied together in condemning the latest enforcement action against Kraken. Referring to the firm’s February settlement with the securities agency, Kraken co-founder Jesse Powell expressed disbelief that the SEC is “back for seconds” after what he assumed was the end of the matter.

Powell went on to call the latest allegations a renewed extortion attempt, adding that the legal cost to fight the charges will likely cost the firm over $100 million, as well as wasted time and effort. He reaffirmed calls for crypto firms “who can’t afford it” to leave the US.

According to crypto lawyer “orlando.btc”, the allegations that Kraken had supported tokens deemed securities by the SEC are “somewhat comical.” The tokens listed in the filing were ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SOL. However, orlando.btc added that none of these tokens have been classified as a security by a court, weakening the agency’s case. 

Adam Cochran, partner at Cinneamhain Ventures, waded into the discussion by calling the SEC’s enforcement “a scummy tactic,” in that the agency has made allegations that numerous tokens are securities offerings yet has opted to go after Kraken instead of the projects directly. Cochran called for more protection against hostile regulators who refuse to give clear guidance.

On the Flipside

• Kraken has announced that it will contest the SEC’s charges, unlike the previous enforcement action that was settled before going to court.
• Regardless of the strength of Kraken’s case, legal battles are costly distractions for crypto businesses trying to operate and scale.
• SEC chair Gary Gensler recently reaffirmed the agency’s goals of being “partners of honest business & prosecutors of dishonesty.”

Why This Matters

While investors do need protection against crypto fraudsters, the SEC’s broad range of enforcement actions has raised concerns that it does not distinguish between “honest” firms and scams. The latest enforcement action against Kraken has reinforced theories that the SEC has a hidden agenda against the entire digital asset industry.

Learn more about the SEC’s first enforcement action against Kraken here:
SEC Tightens Enforcement, Probes Kraken for Violation of Securities Laws

Find out about the relationship between Monero activity and Bitcoin fees here:
Monero Transactions Spike Amid Rising Bitcoin Fees