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SEC Targets Kraken and Popular Cryptos SOL, ADA, MATIC in Crackdown on Alleged Unlicensed Trading Operations
- The SEC named several crypto assets “securities” in its filing, namely SOL, MATIC, ALGO, ATOM, ADA and others.
- The regulator alleges that Kraken unlawfully made hundreds of millions of dollars by offering services common to exchanges, brokers, dealers, and clearing agencies, without the required registrations.
- Kraken paid US$ 30 million in civil penalties in April in the United States and is also embroiled in a legal battle in Australia.
The SEC has charged popular crypto trading platform Kraken, with operating unregistered since at least September 2018. The complaint alleges Kraken illegally earned hundreds of millions of dollars by providing services typical of an exchange, broker, dealer, and clearing agency, without the necessary registrations.
According to the complaint, this has deprived investors of crucial protections like SEC inspections and safeguards against conflicts of interest. Kraken is accused of commingling customer funds and crypto assets with its own, leading to significant risks of loss for customers. The SEC’s complaint, filed in a San Francisco federal court, seeks various legal remedies, including disgorgement of profits, penalties, and injunctive relief for violating the Securities Exchange Act of 1934. Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, said:
“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.”
Gurbir S. Grewal
SEC Alleges Several Coins are Securities
The SEC filing also includes allegations regarding Solana (SOL), Cardano (ADA), Polygon (MATIC), Internet Computer (ICP), Cosmos (ATOM), Algorand (ALGO), Sandbox (SAND), Decentraland (MANA) and Chiliz (CHZ). The SEC specifically refers to these cryptocurrencies as “crypto asset securities,” suggesting that they are investment contracts represented by the underlying crypto asset.
This reflects the SEC’s stance that these cryptos were not merely digital assets, but securities subject to regulatory oversight, particularly concerning how they were offered and sold to investors. The SEC’s focus is on the nature of these assets as investment contracts and the expectations set for investors about potential profits from the efforts of third parties (issuers and promoters).
Earlier this year Kraken agreed to pay US$ 30 million (AU$ 45 million) in civil penalties to the SEC for “offering or selling securities through crypto asset staking services or staking programs.”
It remains to be seen whether Kraken will join others such as Ripple, Grayscale and Coinbase in defending themselves in courts rather than settling with a fine. Nevertheless, the regulation by enforcement approach continues, further damaging the United States’ reputation as a reliable financial marketplace.
Legal Trouble for Kraken Continues
ASIC is in legal proceedings with Kraken in Australia as well, for allegedly failing to meet legal obligations regarding a margin trading product offered to Australian customers. The case focuses on Kraken not making a necessary target market determination before offering the product, which is considered a credit facility since it allows customers to receive credit up to five times the value of their collateral.
Despite ASIC’s previous notification of non-compliance, the watchdog alleges Kraken continues to offer this product without the required determination. ASIC is seeking legal penalties and injunctions as since October 2021, over 1160 Australian customers have used the product, incurring total losses of around AU$ 12.95 million.
The case with ASIC has been listed for February 16, 2024 for case management.
Author
Aaron Feuerstein
Aaron Feuerstein is a freelance writer based in Melbourne. His focus is on decentralised finance and the regulatory space surrounding blockchain. He holds a Master's in Accounting. When he is not studying the latest legal case, he enjoys his time as a modest but eager hobby cook.
