The Securities and Exchange Commission (SEC) charged crypto exchange Kraken yesterday (Monday) for illegally operating an unregistered securities exchange, broker, dealer, and clearing agency. Further, the exchange has been blamed for the comingling of customers’ money and crypto assets with its own.

SEC Charges Kraken

According to the regulator, San Francisco-based Kraken allegedly has intertwined the traditional services of an exchange, broker, dealer, and clearing agency without obtaining any mandatory registration. These charges were similar to the ones brought against Coinbase earlier this year.

The regulator added that the lack of registration has deprived the customers of Kraken of “significant protections”, including regulatory inspection, recordkeeping requirements, and safeguards against conflicts of interest. The lawsuit further charged the crypto exchange for having deficient internal controls and poor recordkeeping practices.

“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,” Gurbir Grewal, the Director of the SEC’s Division of Enforcement, said. “That decision resulted in a business model rife with conflicts of interest that placed investors’ funds at risk.”

The SEC highlighted that Kraken violated the registration provisions of the Securities Exchange Act of 1934 and is now seeking “injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties.”

The charges against Kraken closely resemble those filed against Binance and Coinbase. The SEC initiated legal action against those two crypto exchanges earlier this year. However, it's worth noting that Coinbase was not accused of commingling customer funds.

Kraken’s Response

In a blog post published the same day, Kraken swiftly responded to the allegations against it and intends “to vigorously defend [its] position in court.”

“The complaint against Kraken alleges no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty. It includes big dollar amounts but does not allege a single one of those dollars is missing or misused – no Ponzi scheme, no failure to maintain adequate reserves, and no failure to preserve the identity of client funds 1:1,” the exchange noted. “Indeed, none of these things would be true.”

Interestingly, Kraken did not outright squash the charges of ‘commingling of funds’. Rather, it stated: “The SEC cannot and does not allege that any customer funds are missing, or any loss has occurred. Nor does it allege that any loss will occur. The complaint itself concedes that this so-called 'commingling' is no more than Kraken spending fees it has already earned.”

Earlier this year, Kraken settled with the SEC, paying a penalty of $30 million and agreeing to cease its crypto-staking service.