The fact that the Securities and Exchange Commission (SEC) is bringing a lawsuit against a cryptocurrency exchange, this time Kraken, is barely newsworthy. The SEC’s position that most cryptocurrencies are securities is well known and hence it expects exchange to register as broker dealers. However, the Kraken lawsuit has more serious allegations of commingling of customer and corporate funds. Part of the SEC’s push against crypto exchanges is that registered brokers are required to separate client and corporate assets.
What is not entirely unclear from the SEC legal complaint is whether the alleged commingling is ongoing. It applied to both digital assets as well as cash. Kraken’s audit reports stated customer cash of $30.8 million (in 2020) and $33.6 million (2021) appeared in the exchange’s corporate accounts. At times Kraken has held up to $5 billion in customer cash.
During 2023 the auditor concluded there were material misstatements in the 2020 and 2021 accounts because of the commingling. However, that was based on Kraken highlighting the issue to the auditor – a very positive thing.
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