Kraken says products remain unaffected amid SEC’s new ‘disastrous’ lawsuit

Quick Take

  • Kraken argued that the SEC is “demanding compliance with a regime that doesn’t exist” in response to the regulator’s Monday lawsuit against the crypto exchange.

Cryptocurrency exchange Kraken says its operations are not impacted after the U.S. securities watchdog filed an “incorrect” and “disastrous” lawsuit against the firm on Monday.

Kraken’s comments follow the filing of a lawsuit by the Securities and Exchange Commission against the firm's parent companies, Payward and Payward Ventures, for allegedly operating as an unregistered online trading platform.

In its blog post, Kraken said that the lawsuit has no impact on its products and that it remains “fully committed to our U.S. and global clients and partners.”

The suit follows similar actions against Coinbase and Binance, which the SEC alleges operate unregulated securities exchanges. Separately, the U.S. Department of Justice is reportedly seeking over $4 billion from Binance as part of a deal that could end an ongoing investigation, according to a Bloomberg report on Monday.

As for Kraken's regulatory brouhaha, the firm says that the complaint does not allege fraud.

“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,” Kraken wrote. “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. Indeed, none of these things would be true.”

Specifically, the crypto exchange pointed out that the SEC’s argument that its products were investment contracts was “incorrect as a matter of law, false as a matter of fact, and disastrous as a matter of policy.”

Commenting on the lawsuit in a post on X, Faryar Shirzad, chief policy officer of Coinbase, said that the rule of law requires that the rulers apply actual laws. “It’s been a long honored tradition — and a legal requirement — since America’s founding. It’s also a critical underpinning of the government ruling by the consent of the governed.”


Keep up with the latest news, trends, charts and views on crypto and DeFi with a new biweekly newsletter from The Block's Frank Chaparro

By signing-up you agree to our Terms of Service and Privacy Policy
By signing-up you agree to our Terms of Service and Privacy Policy

SEC points at risks of loss

In the lawsuit, the SEC argued that Kraken has at times held customer crypto assets valued at more than $33 billion, “but it has commingled these crypto assets with its own, creating what its independent auditor had identified in its audit plan as ‘a significant risk of loss’ to its customers.” 

"Similarly, Kraken has held at times more than $5 billion worth of its customers’ cash, and it also commingles some of its customers’ cash with some of its own," the SEC added.

In response, Kraken said in the post that the SEC could not and did not allege that any customer funds were missing, or any loss had occurred. “Nor does it allege that any loss will occur,” the company noted. “The complaint itself concedes that this so-called ‘commingling’ is no more than Kraken spending fees it has already earned.”

In the blog post, Kraken also made references with hyperlinks to the SEC’s previous lawsuits against Ripple and Coinbase, saying that the regulator “famously argues that digital asset trading platforms like Kraken can simply ‘come in and register’ with the agency.”

“As most securities law experts know, there is not a single law on the books supporting this position,” Kraken added. “The allegation is hollow; there is no such thing as an exchange, broker dealer, or clearing agency for investment contracts. The SEC is demanding compliance with a regime that doesn’t exist.”

In February, the SEC charged Kraken’s parent firms with failing to register the offer and sale of their crypto asset staking-as-a-service program. The parent entities settled the charges by paying $30 million in “disgorgement, prejudgment interest, and civil penalties.”

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Timmy Shen is an Asia reporter for The Block. Previously, he wrote about crypto and Web3 for Forkast.News from Taiwan after spending more than three years in Beijing covering finance and current affairs at Caixin Global and Chinese tech at TechNode. His China-related reporting has also appeared in The Guardian. When he's not chasing headlines, you'll find him savoring hot pot and shabu shabu in a Taipei local haunt. Timmy holds an MS degree from Columbia University Graduate School of Journalism. Send tips to [email protected] or get in touch on X/Telegram @timmyhmshen.


To contact the editor of this story:
Frank Chaparro at
[email protected]