SEC Ramps Up its Enforcement Actions and Launches Probe Into Kraken

• The SEC is investigating Kraken, a San Francisco-based cryptocurrency exchange for violating its securities laws.
• Kraken is a crypto exchange that allows customers to buy and sell cryptocurrencies like Bitcoin, Ethereum, and Dogecoin. 

SEC Investigates Kraken for Violating Securities Laws

The Securities and Exchange Commission (SEC) is investigating Kraken, a San Francisco-based cryptocurrency exchange, for violating its securities laws. The probe is in an advanced stage and could result in a settlement in the near future.

This isn’t the first time Kraken has faced allegations from lawmakers. In November 2021, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) opened an investigation into Kraken for allegedly violating economic sanctions against Iran. Kraken eventually agreed to pay a $362,158.70 fine for apparent violations of sanctions against Iran.

Last year, the Commodity Futures Trading Commission (CFTC) ordered Kraken to pay $1.25 million in penalties for “illegally offering margined retail commodity transactions in digital assets,” including Bitcoin (BTC), and failing to register as a futures commission merchant.

As part of the settlement, Kraken will invest an additional $100,000 in sanction compliance controls.

The SEC’s primary theory on whether a crypto asset is a security appears to be based upon whether the blockchain project associated with a crypto asset is, at any point in time, “sufficiently decentralized.” If so, the crypto asset is not a security.

However, this theory has not aged well. It is impractical—if not impossible—to apply to today’s real-life blockchain projects. It is not supported by existing judicial precedent, including the now crypto-famous Howey Supreme Court case. And it has resulted in market distortions that harm both market participants and long-term innovation in the crypto industry.

Kraken’s CEO, Dave Ripley, has said that the exchange has no plans to delist any coins or tokens the SEC has labeled as securities or register with the SEC as a market intermediary. It remains to be seen how the SEC’s investigation will play out, but it is clear that the regulator is taking a close look at the cryptocurrency industry.