As per information from Reuters, the U.S. Securities and Exchange Commission (SEC) has initiated legal action against Payward Inc., commonly known as "Kraken," and Payward Ventures Inc.
The SEC's lawsuit is based on Kraken allegedly operating an online cryptocurrency trading platform without registering with the regulatory body.
The SEC contends that Kraken has been facilitating the buying and selling of crypto assets on its online trading platform since 2013, with many of these assets classified as investment contracts under U.S. securities laws.
The court documents reveal that Kraken served as a broker, dealer, exchange, and clearinghouse for these crypto asset securities without the necessary registration with the SEC.
The SEC further alleges that Kraken, in conducting its operations without adhering to U.S. securities laws, accumulated billions of dollars in fees and trading revenue from investors, potentially compromising investor protection measures.
The regulatory body also raises concerns about Kraken's business practices, citing deficiencies in internal controls and inadequate record-keeping, which pose additional risks. Notably, Kraken is accused of holding over $33 billion worth of customer crypto assets at times, intermingling them with its own assets, thereby creating a significant risk of loss for its customers.
Additionally, the SEC claims that Kraken, at various points, held over $5 billion in customers' cash, mixing some of it with its own funds. The exchange is accused of occasionally covering operational expenses directly from bank accounts containing customer cash.
The SEC's legal case is founded on the Securities Exchange Act of 1934, designed to regulate national securities markets. The regulatory body argues that Kraken's activities fall within the purview of U.S. securities laws due to its operation of a platform where crypto assets are offered and sold as investment contracts.