SEC accuses Kraken of commingling customer funds, operating unregistered exchange

The US Securities and Exchange Commission accused crypto exchange Kraken’s parent companies of operating an unregistered exchange. 

The allegations came in a new lawsuit filed by the US securities regulator on Monday. The claims follow similar allegations contained in court complaints against Coinbase and Binance filed earlier this year. 

Payward and Payward Ventures were named as defendants in the new lawsuit. Kraken did not immediately return a request for comment. 

“Kraken’s business practices, deficient internal controls and inadequate recordkeeping present a range of additional risks that would also be prohibited for any properly registered securities intermediary,” the complaint alleges.

The SEC claims that Kraken knowingly “engaged in the conduct of a securities exchange” and also “described itself as one,” though it is not.

In addition to operating without registration, the SEC claims that Kraken commingled customer crypto assets “with its own.”

According to the suit, an independent auditor reportedly hired by Kraken identified in its audit report that Kraken’s commingling presented “a significant risk of loss” to its customers.

“In fact, Kraken has at times paid operational expenses directly from bank accounts that hold customer cash,” the suit alleges. 

“In failing to prevent known conflicts of interest and commingling its investors’ assets with its own, Kraken demonstrates why registration and the investor protections that come with regulatory oversight are critical to the soundness of the United States capital markets,” the SEC said.

Earlier this year, the SEC accused Binance of commingling customer funds. Binance has denied the SEC’s claims. 

In February, Kraken settled with the SEC over its crypto staking program. It did not, however, admit nor deny the SEC’s allegations.

“At all relevant times, the Kraken Staking Program was offered and sold as an investment contract and therefore a security whose offers and sales were subject to the registration requirements of the federal securities laws,” the SEC said in a court filing at the time. 

Ben Strack contributed reporting.

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