In a significant development, the SEC has taken action against Payward Inc. and Payward Ventures Inc., collectively known as Kraken, for allegedly violating securities regulations. The complaint, filed in federal district court in San Francisco, asserts that Kraken has been operating its crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency since at least September 2018.
The SEC contends that Kraken’s intertwining of traditional exchange, broker, dealer, and clearing agency services without proper registration has deprived investors of essential protections. These include SEC inspections, recordkeeping requirements, and safeguards against conflicts of interest.
One of the key allegations is that Kraken’s business practices, coupled with deficient internal controls and poor recordkeeping, pose various risks for its customers. The SEC claims that Kraken commingles customer funds with its own, even covering operational expenses directly from accounts holding customer cash. Additionally, the mixing of customers’ crypto assets with Kraken’s own is flagged as a “significant risk of loss” by the platform’s auditor.
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.”
The SEC’s complaint seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties. Kraken had previously agreed, in February of this year, to cease offering securities through crypto asset staking services and staking programs and pay a civil penalty of $30 million.
The SEC’s investigation, conducted by the Division of Enforcement’s Crypto Assets and Cyber Unit, highlights the regulator’s commitment to addressing non-compliance within the crypto space. This enforcement action against Kraken serves not only as a punitive measure but also as a stern message to other entities to prioritize compliance with securities laws.
Frequently Asked Questions (FAQs):
Q1: What led to the SEC charging Kraken?
A1: The SEC charged Kraken for allegedly operating its crypto trading platform as an unregistered securities exchange, broker, dealer, and clearing agency, violating securities regulations.
Q2: What risks are highlighted in the SEC’s complaint against Kraken?
A2: The SEC asserts that Kraken’s business practices, deficient internal controls, and poor recordkeeping pose risks for customers, including commingling of funds and crypto assets.
Q3: What penalties does the SEC seek in its complaint?
A3: The SEC’s complaint seeks injunctive relief, conduct-based injunctions, disgorgement of ill-gotten gains plus interest, and penalties against Kraken.
Conclusion:
The SEC’s charges against Kraken mark a significant move in the regulatory landscape for crypto platforms. It underscores the importance of adherence to securities laws and investor protection. Kraken’s alleged violations serve as a cautionary tale for other entities operating in the crypto space, emphasizing the need for compliance to avoid legal repercussions.
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