On November 20, 2023, the SEC filed a complaint in the United States District Court for the Northern District of California against Payward, Inc. and Payward Ventures, Inc. which, together, do business as Kraken.1 The complaint alleges Kraken has been operating for a decade as an unregistered securities exchange, broker-dealer, and clearing agency.
The complaint highlights certain risks resulting from Kraken’s unregistered status and merging of these traditionally separate market functions into one business, including comingling of customer crypto assets and cash with its own. However, unlike the SEC’s action against Binance, which charges (negligence-based) fraud, this is a pure registration case.
The complaint names no new crypto assets that, in the SEC’s view, constitute securities under the Howey test or otherwise.2
At this point, it seems unfair to the staffers in the Enforcement Division who must litigate these registration-based cases. Let them bring the fraud cases. That is where the market needs them.
Instead, they are asked to tilt at windmills in the fog of regulatory uncertainty when it is the job of the rulemaking divisions of the SEC and the Commission itself to provide clarity and guidance on such issues. Yet, more than eight years after the Ethereum blockchain was created, two years as SEC Chair, five years as CFTC Chair, and a stint as an MIT professor of blockchain, Gary Gensler refused to say whether ETH was a commodity or a security at a hearing before the House Financial Services Committee.3
As we here at SKrypto have said before, a good, honest lawyer could write both sides of the brief on the securities law status of many of these tokens. Dispiritingly, the SEC’s complaint against Kraken says, “For purposes of prevailing on the Exchange Act claims set forth herein, the SEC need only establish that Kraken has engaged in regulated activities relating to a single crypto asset security during the Relevant Period.”
Technically, true. A victory, we suppose, but a pyrrhic one at best. Like the muddled result in the SEC’s action against Ripple Labs, it would offer little clarity to market participants and investors on the securities law status of other tokens.
1 On Feb. 9, 2023, the SEC filed a settled action against Payward Ventures, Inc. in connection with the unregistered offer and sale of Kraken’s staking-as-a-service program.
2 Instead, the complaint notes that Kraken makes available for trading tokens that have been the subject of other SEC enforcement actions, namely ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SOL.
3 Chair Gensler is willing to say BTC is not a security so, perhaps, the gestation period for a decision on the securities law status of a token is more like 14 years.