Where “Off the Grid” Equals Customer Risk: Kraken
Congress created the federal securities laws to protect investors by, for example, ensuring that material information regarding investments would be available to potential investors when making a decision regarding the purchase or sale of a security. Thus, when a market professional solicits an investor to purchase or sell a security it is axiomatic that the would be investor has available the material information necessary to make an informed decision. The same is true for making a decision about listing a firm’s securities for trading or entering into an investment program with an investment adviser.
Crypto, in contrast, was born to “get off the grid,” that is, go a different way. While some offerings may have a “White Paper” that contains certain information, or use other instruments such as “Smart Contracts,” a kind of standard from agreement, the point is not the same. Off the grid all to often turns out to mean insufficient information and little or know investor protections. A good example is one of the Commission’s most recent cases in this area, SEC v. Payward, Inc. and Payward Ventures, Inc., Civil Action No. 3:23-cv-06003 (N.D. Ca. Filed November 20, 2023).
Defendants are two entities based in San Francisco. Ventures recently settled a case with the Commission based on the sale of unregistered securities. Collectively, the two firms are known as Kraken.
Since 2013 Kraken has operated an online trading platform. Customers can purchase and sell crypto assets on the trading platform. Many are viewed by the SEC as investment contracts. Nevertheless, no registration is required by Kraken. To the contrary, the firm simultaneously acts as broker, dealer, exchange and clearing agency.
The business practices of Kraken create risks for investors which may not be readily apparent. Not only does the firm operate without any registration, even where the crypto asset may be a security, internal controls and recordkeeping is deficient.
The firm also frequently comingles customer crypto assets with its own. Its auditors identified this practice as one that creates a “significant risk” for customers. Kraken also comingles customer cash with its own. At times Kraken has paid operational expenses directly from bank account that contain customer cash. And, its recordkeeping for customer assets resulted in material errors in 2020 and 2021.
The firm’s deficient practices are the result of putting its own financial interests ahead of those of its customers, according to the complaint. This practice creates substantial risks for customers. The complaint alleges violations of Securities Act Sections 5, 15(a) and 17A(b). The case is in litigation.
Where “Off the Grid” Equals Customer Risk: Kraken
Congress created the federal securities laws to protect investors by, for example, ensuring that material information regarding investments would be available to potential investors when making a decision regarding the purchase or sale of a security. Thus, when a market professional solicits an investor to purchase or sell a security it is axiomatic that the would be investor has available the material information necessary to make an informed decision. The same is true for making a decision about listing a firm’s securities for trading or entering into an investment program with an investment adviser.
Crypto, in contrast, was born to “get off the grid,” that is, go a different way. While some offerings may have a “White Paper” that contains certain information, or use other instruments such as “Smart Contracts,” a kind of standard from agreement, the point is not the same. Off the grid all to often turns out to mean insufficient information and little or know investor protections. A good example is one of the Commission’s most recent cases in this area, SEC v. Payward, Inc. and Payward Ventures, Inc., Civil Action No. 3:23-cv-06003 (N.D. Ca. Filed November 20, 2023).
Defendants are two entities based in San Francisco. Ventures recently settled a case with the Commission based on the sale of unregistered securities. Collectively, the two firms are known as Kraken.
Since 2013 Kraken has operated an online trading platform. Customers can purchase and sell crypto assets on the trading platform. Many are viewed by the SEC as investment contracts. Nevertheless, no registration is required by Kraken. To the contrary, the firm simultaneously acts as broker, dealer, exchange and clearing agency.
The business practices of Kraken create risks for investors which may not be readily apparent. Not only does the firm operate without any registration, even where the crypto asset may be a security, internal controls and recordkeeping is deficient.
The firm also frequently comingles customer crypto assets with its own. Its auditors identified this practice as one that creates a “significant risk” for customers. Kraken also comingles customer cash with its own. At times Kraken has paid operational expenses directly from bank account that contain customer cash. And, its recordkeeping for customer assets resulted in material errors in 2020 and 2021.
The firm’s deficient practices are the result of putting its own financial interests ahead of those of its customers, according to the complaint. This practice creates substantial risks for customers. The complaint alleges violations of Securities Act Sections 5, 15(a) and 17A(b). The case is in litigation.