Nov 21, 2023

Crypto exchange Kraken commingled customer and corporate funds while operating as an unregistered broker, clearing agency and dealer, the U.S. Securities and Exchange Commission (SEC) alleged in a new lawsuit Monday.

Video transcript

Kraken is the latest us crypto exchange targeted by the Securities and exchange commission in a series of similar actions being fought in court by other firms. Joining us now to discuss coin desk, global policy and regulation. Managing editor Nick Day who is also the editor of coin desks. State of crypto newsletter. Nick. Good morning to you. Good morning. All right. Cracking the, the latest exchange to feel the wrath of the SEC. Talk to us about what the SEC is alleging in their new lawsuit. Yeah. So the basic allegations are that cracking is simultaneously operating an unregistered broker, securities, uh dealer, uh clearing house and exchange, uh listing a number of cryptocurrencies that the SEC believes are unregistered securities. And uh you know, we have a list, um again, like as you mentioned at the beginning, these are very similar allegations to what the SEC has filed against companies like win based finance. And the, you know, the unique kind of twist for Kraken is they're also alleging uh co mingling or record keeping and a couple other actions that they say would be prohibited under the S CCS uh regulations if Kracken was a registered entity. Um The lawsuit is trying to seek to enjoin them from violating the law. So, you know, basically either trying to get them to register and split apart of businesses. So, you know, that we mentioned or, you know, shut down. Now, that's not nothing. I mean, co mingling obviously is something we've heard that one before. Uh, there was a, you know, that, that exchange in, in the Bahamas that did that. Um, So that's a pretty, pretty severe allegation. Um So ho how, I mean, isn't it shouldn't, isn't that sort of like the star accusation if you will about what Kraken is doing or is that just sort of a footnote in the uh S ECs complaint? It's the thing that the SEC is going to use to try and make its argument, right? Um You know, again, we've seen the similar, you know, core allegations against finance and co based on a couple other exchanges with the Queen based case. We didn't really see, you know, any allegations. Uh You know, quite the same with Binance we did and the concern we're probably gonna hear in court and this is kind of me extrapolating a little bit here is, um you know, because these are the things that happened. Uh The SEC is going, you know, believes that it's danger to customers and investors and whoever crackings response in a blog post is that, you know, the SEC has not actually alleged that any customers were harmed or that any customer funds have been, uh, you know, stolen, that customers have been able to access their assets. Um, you know, this is again a similar argument that we saw to Binance and how, you know, a court might see. It may well, just depend on what judge gets the case. Um, yeah, at least at this stage whether or not a customer, whether or not a customer is affected is not necessarily the issue, right? The issue is that once you co mingle mingle your funds all hell breaks loose. I mean, that's like one of the, the most egregious thing you could possibly do as a fiduciary. Yeah, I would imagine that's what the S ECs argument is going to be. Uh, but, you know, it's worth remembering that we did see similar allegations against finance when that lawsuit dropped and the SEC moved for a temporary restraining order to try and restrict finance from accessing or moving any of those funds. And the judge who oversaw that case wasn't really convinced, at least as far as a tro was. So, um, I, you know, you're correct in that, yes, this, you know, if the allegation is, here's how they broke the law. The question of what happened to the funds is kind of secondary after that. Um, you know, the core question is like, was law broken and the SEC says, yes, here's out and crack his defense is, well, customers weren't harmed but it really, you know, at least at this stage it really could just depend on which judge gets the case and how they view it. And also, I guess if the sec Moose were a tro or some kind of similar, you know, attempt to freeze funds. Um, yeah, I think that was a big part of why the judge push back last time. But again, yeah, this is gonna, we're in the early stages. So it's gonna be a little kind of uh interesting. Let's say Nick has crack and responded. Yeah, there's a blog post, there was a statement um cracking obviously as well. They say they intend to fight. Um They, I think he put a statement on the screen just there. Um You know, they disagree with the S ECs views. They say that the SEC has, uh you know, made it impossible for companies to, you know, quote come in and register. And so they're, you know, pushing back against that um in the blog post. They had a bit more. Uh again, they said, you know, the SEC is alleging commingling, but they haven't shown or alleged that any customers are harmed, things like that. So, uh you know, more or less what you'd kind of expect from a company that's facing this change, uh sorry, facing a lawsuit from the SEC at this point. So speaking of uh of exchanges, bres, uh that seems to be going out of business or at least closing what they're going to be doing next. But, uh, yeah, what's going on there? Yeah. Bit Global announced that, uh, I think it's next week they're shutting down. They're, you know, telling customers to withdraw, they can't withdraw us. D uh, we're noting this is Bit Rx. Global. Bit rex US was already shut down and, you know, I mentioned that some other exchanges had settled charges with the SECR was one of them, but Rex was sued by the SEC on allegations similar to a cracking that, uh, bit settled without admitting or denying any of the charges. Uh, shuttered. The US Exchange is now shuttering its global exchange. But it's also that it, I, I mean, when it, when it comes to this kind of AAA S a bit was not, it was not like a small, uh, exchange. It's not like a mom and pop thing. I mean, it wasn't the biggest one but it's certainly significant. Yeah. No, this is, you know, one of the kind of storied longer running exchanges, um, you know, they've been involved in all sorts of things probably, I mean, the biggest thing I can think of that they were involved in is they had that massive settlement with the US Treasury Department say it was last year, uh, over sanctions violations concerns. But yeah, they've been around a while. Um, it, you know, just kind of sounds like based on, you know what I've heard from, you know, sources over the past year is, uh, you know, part of this might just be that they weren't able to really keep profitable company going. Uh, at least as far as the exchange part was concerned or, you know, at the end, at this point, who knows the sec settlement was a massive fine. The fact settlement was a massive fine. Uh, you know, it is, as you say, uh, established exchange that it.

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