The US Securities and Exchange Commission (SEC) filed a federal lawsuit against the world’s third-largest cryptocurrency exchange on Monday, accusing it of operating without supervisory approval.
The action against Kraken by the financial markets regulator will likely pour cold water on the hopes of many firms in the sector that it was taking its foot off the gas when it came to regulation after a series of unfavorable court rulings.
The SEC took legal action in June this year against Binance — the world’s leading crypto exchange — as well as the runner-up, Coinbase.
The proceedings against Kraken began on Monday in federal court in San Francisco, targeting Payward and Payward Ventures, the two legal entities behind the exchange.
According to the SEC, the site, which recently celebrated its 10th anniversary, “intertwines the traditional services of an exchange, broker, dealer, and clearing agency without having registered any of those functions with the Commission as required by law.”
This failure to register “deprived investors of significant protections,” which, according to the regulator, should have included inspection by the SEC, record keeping requirements, and safeguards against conflicts of interest.
The authorities also accused Kraken of mixing customers funds with its own to pay operating expenses.
According to the SEC, the companies’ auditor reported a “significant risk of loss” to customers as a result of these practices.
Kraken’s business model is “rife with conflicts of interest that placed investors’ funds at risk,” Director of the SEC’s Division of Enforcement, Gurbir Grewal, said in a statement.
In a message posted on its website, Kraken disputed the accusations made in the SEC’s lawsuit, and argued that it was not required to register with the regulator.
“We disagree, and intend to vigorously defend our position in court,” the company said.
“Today’s news has no impact on the products we offer and we will continue to provide services to our clients without interruption,” it added.
The crypto world recently picked up steam, with observers anticipating the SEC would give the green light for a new form of product for investing in cryptocurrency.
The product, known as Exchange Traded Funds (ETFs)would be index funds invested in cryptocurrency, which investors could buy or sell at any time without having to go through a dedicated exchange platform, thus potentially democratizing investment in digital currencies.
Hopes of a softening in the SEC’s stance rose following two legal setbacks for the regulator in October which undermined its stated desire to establish itself as the benchmark authority on cryptocurrencies.
