In its latest move against the crypto industry, the US Securities and Exchange Commission (SEC) has filed charges against Kraken, alleging the operation of an unregistered securities exchange, clearing agency, and broker. This comes as part of the SEC's ongoing efforts to corral what it perceives as a wild west of crypto companies flouting securities laws.
Kraken joins Coinbase and Binance, both of which have faced charges from the SEC, with the latter being slapped with a US4.3 billion dollar fine as well as a personal US$50 million dollar fine and a subsequent resignation of its CEO, Changpeng Zhao.
In a response to the SEC action in its blog, Kraken stated:
We disagree [with the SEC's complaint against Kraken], and intend to vigorously defend our position in court. [The news] has no impact on the products we offer and we will continue to provide services to our clients without interruption.
Jonathon Miller, the managing director of Kraken said:
A critical point of contention lies in the SEC's demand for crypto exchanges to register, a requirement that exchanges say lacks legal backing and there is a question over whether tokens are or are not securities (a matter ruled on for one token against the SEC in the Ripple case). Kraken asserts registration is impossible and there is no path to compliance.
The SEC 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. The SEC has promulgated no rule describing how an order in a digital asset should be matched, no guidance on how a trade should be cleared, and articulated no standards for how to broker a digital asset transaction. 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.
The regulatory body's "regulation by enforcement" strategy has drawn criticism with Congressman McHenry saying to Chair of the SEC Gary Gensler earlier this year:
You have refused to provide clarity on whether digital assets offered as part of an investment contract are subject to securities laws. And, more importantly, how these firms should comply with those laws creating uncertainty rather than providing clear guidelines for industry participants.
Senator Cynthia Lummis also slammed the SEC saying:
The SEC alleges that Kraken lists 16 tokens which are securities, echoing charges against Coinbase and Binance. Simultaneously, the agency accuses Kraken of poor internal controls and recordkeeping practices, claiming that the company commingles customer funds and crypto assets with its own, posing a "significant risk of loss" to customers.
This latest development follows Kraken's settlement with the SEC earlier this year over its staking services, where it agreed to a suspension and a USD$30 million civil penalty.
As the SEC intensifies its crackdown on crypto companies like Kraken and Binance, questions will continue to persist over a "regulation by enforcement" strategy. This approach, as seen in previous actions against blockchain industry players, is an inefficient way of guiding a growing industry into compliance and risks stifling blockchain innovation and also arguably causes unnecessary harm to consumers.
Where laws are clear, such as anti-money laundering, the industry has shown great progress in meeting compliance requirements (and where businesses have breached these laws they have suffered the consequences).
A continued regulation by enforcement may lead to the US pushing innovation away to jurisdictions where regulations and regulators are more welcoming. A constructive dialogue and providing clear guidelines will be essential to avoid hampering the transformative potential of blockchain technology and driving innovation beyond its regulatory grasp, but that goal seems increasingly out of reach, no matter how many appendages reach for it.
By Michael Bacina, Luke Misthos, and Luke Higgins