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SEC Charges Kraken for Unregistered Operations in Crypto Trading

The SEC has charged Kraken with operating as an unregistered securities exchange.

The SEC has charged Kraken with operating as an unregistered securities exchange.
Credit: Dennis Diatel/Shutterstock 2021

WASHINGTON - The U.S. Securities and Exchange Commission (SEC) has recently charged Payward Inc. and Payward Ventures Inc., collectively known as Kraken, for operating their crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency.

Why SEC Took Action

The SEC alleges that since at least September 2018, Kraken has been unlawfully facilitating the buying and selling of crypto asset securities, raking in hundreds of millions of dollars in the process. The heart of the matter lies in Kraken's failure to register its operations with the SEC, depriving investors of crucial protections mandated by law.

According to Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, stated:

"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."

Kraken's Alleged Wrongdoings

1. Operating as an Exchange: Kraken is accused of providing a marketplace that functions like an exchange, bringing together buyers and sellers without the necessary registration.

2. Broker and Dealer Activities: The SEC contends that Kraken engages in the business of effecting securities transactions for customers and buys/sells securities for its own account without the required registration as a broker and dealer.

3. Clearing Agency Function: The complaint outlines Kraken's role as an intermediary in settling transactions in crypto asset securities, acting as a securities depository without proper registration.

Risks to Investors

The SEC's complaint also sheds light on Kraken's business practices, citing deficient internal controls and poor record keeping. Kraken allegedly commingles customer money and crypto assets with its own, exposing customers to significant risks, as identified by its own auditor.

In February of this year, Kraken had already agreed to cease offering certain services and pay a civil penalty of $30 million. The SEC's legal action seeks injunctive relief, disgorgement of ill-gotten gains, and penalties.

Investors are reminded to remain vigilant in the rapidly evolving landscape of cryptocurrency trading, and authorities are sending a clear message that compliance with securities laws is non-negotiable.


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