In a recent turn of events, the Securities and Exchange Commission (SEC) has filed a lawsuit against the well-known cryptocurrency exchange, Kraken. While it is not surprising that the SEC is taking legal action against a cryptocurrency exchange, as they have consistently maintained that most cryptocurrencies are securities, this lawsuit brings forth more serious allegations of commingling of customer and corporate funds.
One crucial aspect that remains uncertain from the SEC’s legal complaint is whether the alleged commingling is an ongoing practice. The lawsuit reveals that Kraken’s audit reports indicated instances where customer cash of up to $5 billion appeared in the exchange’s corporate accounts. Additionally, material misstatements were found in the 2020 and 2021 accounts due to the commingling, although it is worth noting that Kraken proactively highlighted this issue to the auditor.
Surprisingly, the lawsuit does not mention the completion of the 2022 audit or any findings related to it. However, it does highlight the significant risk associated with the commingling of custodial and proprietary digital assets. This poses concerns over potential losses resulting from theft or improper controls.
Apart from cash, the lawsuit also alleges commingling of digital assets, with Kraken reportedly holding $33 billion in assets at one point. Notably, the exchange informed its auditor that it does not track the accounting of margined and non-margined crypto assets separately.
With the recent lawsuits against Coinbase and Binance in mind, one may question why the SEC has chosen to pursue legal action against Kraken at this specific time. One possible explanation could be Kraken’s prior willingness to settle, as evidenced by their decision to pull their staking offering and pay a $30 million fine earlier this year. This may have prompted the SEC to target Kraken once again.
These developments raise significant questions about the practices of cryptocurrency exchanges and the role of regulatory bodies in overseeing their operations. It remains to be seen how this lawsuit will unfold and what implications it may have for the broader crypto industry.