SEC versus Ripple, SEC versus Coinbase, SEC versus Binance, SEC versus Uniswap — the list goes on, seemingly expanding with new victims falling under Gary Gensler’s watchful eye. This time, the verbal battle between Kraken and the U.S. Securities and Exchange Commission (SEC) continued with a fresh statement from the cryptocurrency exchange, boldly claiming that the agency’s arguments were simply misspoken.
Related: Cryptocurrency Exchange Kraken Intends to Defend Itself in Court Against the SEC
On Thursday, Kraken fired back at the SEC’s April letter regarding the company’s motion to dismiss the case, asserting that the agency failed to identify “any investment contracts that were (or could have been) sold, intermediated, or settled on Kraken.” The document pointed out that the SEC, in its arguments, interchangeably used the terms “investment concept” and “ecosystem” instead of “investment contract” and “enterprise.”
In its April statement, the SEC noted that “words alone do not define the type of security, as ‘actions are not limited to the obvious and banal,’ quoting precedent law.
In November, the SEC accused Kraken of operating as an unregistered broker-dealer, exchange, and clearing agency. Similar charges were levied in its cases against Binance Holdings and Coinbase Global. In February 2023, Kraken, whose parent company is Payward Inc., settled certain charges brought by the SEC against its staking business.
The Kraken-SEC Conflict: Beginning
According to the SEC’s complaint, since 2019, Kraken has been peddling its crypto assets’ “placement services” to the masses. Essentially, Kraken pools certain tokens handed over by investors and bets them on behalf of said investors. When investors entrust tokens to service providers offering staking services, they lose control over these assets and assume the inherent risks of such platforms, often with limited safeguards in place.
The complaint alleges that Kraken advertises its investment staking program as offering a user-friendly platform and benefits stemming from Kraken’s efforts on behalf of investors, including Kraken’s strategies for generating regular investment returns and payouts.
“Whether it’s staking as a service, lending, or any other means, crypto intermediaries offering investment contracts in exchange for investors’ tokens must provide proper disclosure and assurances required by our securities laws,” said SEC Chair Gary Gensler.
In February 2023, the Securities and Exchange Commission leveled allegations against Payward Ventures, Inc. and Payward Trading Ltd., commonly recognized as Kraken, for their alleged failure to register their crypto asset placement program. This program facilitated the exchange of crypto assets by investors in return for participation in advertised annual investment returns of 21 percent.
To settle the SEC’s allegations, the two Kraken entities agreed to immediately cease offering or selling securities through crypto asset placement services or placement programs and to pay $30 million as compensation for refunding funds, disgorgement, and civil penalties.
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In addition to discontinuing the staking program and providing financial restitution, Payward Ventures, Inc. and Payward Trading, Ltd, without admitting or denying the SEC’s allegations, agreed to entry of a final judgment, subject to court approval, permanently enjoining each of them from violating Section 5 of the Securities Act of 1933 and permanently enjoining them and any entity they control, directly or indirectly, from offering or selling securities through crypto asset placement services or placement programs.
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