Crypto Compliance or Overreach? SEC's Kraken Crusade Sparks Industry Debate

<p>In a significant development,
<a href="https://www.sec.gov/news/press-release/2023-237" target="_blank" rel="nofollow">the Securities and Exchange Commission (SEC) has charged Payward Inc. and
Payward Ventures Inc.</a>, collectively known as Kraken, for operating its crypto
trading platform as an unregistered securities exchange, broker, dealer, and
clearing agency. The SEC alleges that Kraken has unlawfully facilitated the
buying and selling of crypto asset securities, amassing hundreds of millions of
dollars in violation of securities laws.</p>
<p><span>According to the SEC's
complaint, Kraken's unconventional blend of functions—acting as an exchange,
broker, dealer, and clearing agency—has been executed without the required
registration with the Commission. This lack of registration has left investors without
essential protections, including SEC inspection, recordkeeping oversight, and
safeguards against conflicts of interest.</span></p>
<p><span>The complaint outlines specific
actions by Kraken, asserting that the platform provides a marketplace for
securities trading, executes transactions for its customers, engages in buying
and selling securities for its own account, and acts as an intermediary in
settling transactions in crypto asset securities. The SEC also raises concerns
about Kraken's business practices, deficient internal controls, and
questionable recordkeeping, emphasizing potential risks for its customers.</span></p>
<h2><strong><span>“…incorrect
as a matter of law, false as a matter of fact, and disastrous as a matter of
policy”: Kraken Responds Defiantly</span></strong></h2>
<p><a href="https://blog.kraken.com/news/kraken-continues-to-fight-for-its-mission-and-crypto-innovation-in-the-united-states" target="_blank" rel="nofollow">In response to the SEC's
charges</a>, Kraken released a statement vehemently disputing the allegations. The
company asserts its intention to vigorously defend its position in court,
emphasizing that the SEC's complaint contains no accusations of fraud, market
manipulation, customer losses due to security breaches, or breaches of
fiduciary duty.</p><blockquote><p lang="en" dir="ltr">Today, the SEC
filed a complaint alleging that Kraken operates as an unregistered
national securities exchange, broker, and clearing house. We disagree
with their claims and plan to vigorously defend our position. <a href="https://t.co/a0C4wzBo3f">https://t.co/a0C4wzBo3f</a></p>—
Kraken Exchange (@krakenfx) <a href="https://twitter.com/krakenfx/status/1726753079201034466?ref_src=twsrc%5Etfw">November
21, 2023</a></blockquote>

<p><span>Kraken's statement underscores
that the SEC's case hinges on a technical argument, asserting that the platform
requires special securities licenses due to the nature of the digital assets it
supports. Kraken rejects this premise as legally incorrect, factually false,
and detrimental to the broader regulatory landscape.</span></p>
<h3><strong><span>Legal
Precedent and Congressional Action</span></strong></h3>
<p><span>Kraken draws attention to a
previous case where the SEC's attempt to categorize digital assets as
securities transactions was rejected by the Federal Court for the Southern
District of New York. The statement argues that the SEC's current case against
Kraken is destined to fail for the same reasons—failure to satisfy legal tests
and misalignment with the economic reality of digital asset transactions.</span></p>
<p><span>Furthermore, Kraken emphasizes
the absence of a regulatory framework provided by the SEC for digital asset
transactions, stating that the agency's demand for compliance is unsupported by
existing laws and regulations. The company points out that congressional action
is underway, with bipartisan bills in progress to establish clear registration
and oversight frameworks for centralized trading platforms.</span></p>

<h3><strong><span>Kraken Founder Lambasts SEC
Amidst Legal Battle</span></strong></h3>
<p><span>Jesse Powell, co-founder of
Kraken, launched a scathing attack on the United States Securities and Exchange
Commission (SEC) after the regulatory body filed a lawsuit against the
cryptocurrency exchange, alleging securities law violations. Powell referred to
the SEC as "USA's top decel" in a post on X (formerly Twitter), a
term used in tech circles to insult someone impeding progress. He claimed the
SEC, dissatisfied with the $30 million settlement in February, is now seeking
further action against Kraken.</span></p>
<blockquote><p lang="en" dir="ltr">Message is clear:
$30m buys you about 10 months before the SEC comes around to extort you
again. Lawyers can do a lot with $30m but the SEC knows that a real
fight will likely cost $100m+, and valuable time. If you can't
afford it, get your crypto company out of the US
warzone.</p>— Jesse Powell (@jespow) <a href="https://twitter.com/jespow/status/1726794688433369290?ref_src=twsrc%5Etfw">November
21, 2023</a></blockquote>

<p><span>Powell's posts on social media
emphasized the SEC's persistent pursuit of regulatory action against Kraken,
despite the earlier settlement. He questioned the SEC's motives and stated,
"Now they're back for seconds?" The co-founder warned other crypto
companies about the challenges of operating in the "US warzone,"
suggesting that leaving the U.S. could be a strategic move to avoid costly
legal battles.</span></p>
<h2><strong><span>Potential Harm to U.S.
Crypto Market</span></strong></h2>
<p><span>As regulatory scrutiny
intensifies, the actions of the SEC might inadvertently drive investors away
from the already turbulent U.S. crypto market and toward more stable
jurisdictions.</span></p>
<h3><strong><span>Impact on Investor
Confidence</span></strong></h3>
<p><span>The SEC's persistent legal
actions against Kraken, despite a previous settlement, could undermine investor
confidence in the U.S. crypto market. Investors may perceive regulatory
uncertainty and continuous legal challenges as obstacles to the growth and stability
of the market, potentially leading them to explore alternative jurisdictions
for crypto investments.</span></p>
<h3><strong><span>Global Competition and
Innovation</span></strong></h3>
<p><span>As regulatory authorities
worldwide grapple with how to approach cryptocurrencies, some jurisdictions are
adopting more accommodative frameworks to attract crypto businesses and
investors. The SEC's stringent stance and legal actions against prominent players
like Kraken may prompt crypto companies to consider relocating to jurisdictions
with clearer and more favorable regulatory environments. This shift could
result in a loss of innovation and economic benefits for the U.S. as crypto
firms seek friendlier regulatory climates.</span></p>
<h3><strong><span>Impact on Market
Dynamics</span></strong></h3>
<p><span>The ongoing legal battle might
contribute to the perception that the U.S. is falling behind in embracing the
transformative potential of blockchain and cryptocurrencies. Investors seeking
a more predictable regulatory landscape may divert their funds to markets where
regulatory clarity and support for innovation are more evident, potentially
affecting the dynamics of the U.S. crypto market.</span></p>
<h3><strong><span>Investor Flight to
Stable Jurisdictions</span></strong></h3>
<p><span>The cryptocurrency market
operates on a global scale, allowing investors to choose from a variety of
jurisdictions for their crypto activities. If the U.S. continues to face
regulatory challenges and legal uncertainties, investors may opt for
jurisdictions that are perceived as more stable and crypto-friendly. This could
lead to a flight of capital from the U.S. market, impacting its competitiveness
in the evolving crypto landscape.</span></p>
<h3><strong><span>Need for Regulatory
Clarity</span></strong></h3>
<p><span>The SEC's actions highlight the
urgent need for regulatory clarity and a comprehensive framework for
cryptocurrencies in the U.S. A more transparent and accommodating regulatory
approach could foster innovation, attract investment, and position the U.S. as
a leader in the rapidly growing crypto industry.</span></p>
<h2><strong><span>Conclusion</span></strong></h2>
<p><span>The SEC's legal actions against
Kraken have broader implications for the U.S. crypto market. Striking a balance
between investor protection and fostering innovation is crucial for the
sustainable growth of the crypto ecosystem. Regulatory authorities must work
collaboratively with industry participants to develop frameworks that address
risks while providing the clarity necessary for investors to confidently engage
in the dynamic world of cryptocurrencies. Failure to do so may result in
investors seeking refuge in jurisdictions perceived as more welcoming to the
crypto industry, potentially hampering the growth of the U.S. market.</span></p>
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This article was written by Pedro Ferreira at www.financemagnates.com.