Is the Future of US Crypto Exchanges in Jeopardy? Binance Folds, but Kraken Holds Ground

It appears that once again, the Securities and Exchange Commission in the US has a major crypto exchange in its sights, as it has filed a lawsuit charging Kraken, the 10th biggest centralized crypto exchange by spot trading volume, with operating as an unregistered securities broker, dealer, exchange and clearing agency, and with commingling customer assets with its own corporate assets.

The SEC’s complaint makes mention of the Howey Test for determining whether assets are investment contracts and can be regarded as securities, and listed crypto assets that it has determined in previous cases (against Bittrex, Binance, and Coinbase) to be securities, specifically, the SEC mentioned: “Crypto assets trading under the symbols ADA, AXS, ALGO, ATOM, CHZ, COTI, DASH, FIL, FLOW, ICP, MANA, MATIC, NEAR, OMG, SAND, and SOL.”

Notably, there is no report of Ether (which trades under the ETH symbol), and it has been taken as a positive signal with regard to the various ETH ETF applications that are currently under consideration at the SEC, while it has also long been established that Bitcoin is classified as a commodity.

However, in response to these charges, Kraken has come out in a combative frame of mind and appears unwilling to take the allegations lying down.

Kraken Posts Its Defense

Kraken's CEO, Dave Ripley, stated, in a quick response to the SEC: “We strongly disagree with the SEC claims, stand firm in our view that we do not list securities, and plan to vigorously defend our position.”

We strongly disagree with the SEC claims, stand firm in our view that we do not list securities, and plan to vigorously defend our position.

As we have seen before, the SEC argues that @krakenfx should “come in and register” with the agency, when there is no clear path to…

— Dave Ripley (@DavidLRipley) November 21, 2023

And, Kraken has published an unambiguous blog post articulating its position, which begins by stating that Kraken denies accusations that it “operates as an unregistered securities exchange, broker, and clearing house”. It intends to contest these accusations in court, and in the meantime, will continue to operate its services as usual.

The post from Kraken stated: “The complaint against Kraken alleges no fraud, no market manipulation, no customer losses due to hacking or compromised security, and no breaches of fiduciary duty. It includes big dollar amounts but does not allege a single one of those dollars is missing or misused – no ponzi scheme, no failure to maintain adequate reserves, and no failure to preserve the identity of client funds 1:1. Indeed, none of these things would be true.”

From there, it hinges around the discussion of technical points, asserting that crypto assets are, in fact, not investment contracts, citing precedent from the SEC’s actions against Ripple Labs, in which The Federal Court for the Southern District of New York ruled against the SEC.

With regard to commingling funds, Kraken’s argument stated that: “the SEC cannot and does not allege that any customer funds are missing, or any loss has occurred. Nor does it allege that any loss will occur. The complaint itself concedes that this so-called 'commingling' is no more than Kraken spending fees it has already earned.”

Kraken also alleged that there is no mechanism by which crypto platforms can amiably register with the SEC, implying that the agency is not offering any viable routes to satisfy regulatory requirements, and added that: “The SEC has promulgated no rule describing how an order in a digital asset should be matched, no guidance on how a trade should be cleared, and articulated no standards for how to broker a digital asset transaction.”

Some of the points made by Kraken rework familiar arguments that have been taking place for some time about crypto in the US, revolving around whether or not crypto assets should be treated as securities falling within the remit of the SEC, and whether or not a practical way for crypto exchanges to register with the SEC even exists.

Relating to this ongoing disagreement, Kraken has received support from pro-crypto Senator Cynthia Lummis, who stated that the SEC “cannot continue ruling by enforcement.”

The SEC cannot continue ruling by enforcement. My statement on the Kraken lawsuit below: pic.twitter.com/J3qhzU624N

— Senator Cynthia Lummis (@SenLummis) November 21, 2023

Kraken’s post also mentioned the role of Congress in questioning the SEC’s approach and draws attention to bi-partisan attempts to establish registration and oversight frameworks for crypto exchanges, while pointing to Kraken’s compliance with legal requirements in various regions around the world.

Binance Fined and CZ Steps Down

Relatedly, this week saw Binance was ordered by the Department of Justice to pay a $4.3 billion fine, bringing an end to a years-long investigation. Additionally, Binance's Founder and CEO, Changpeng Zhao (known as CZ), who is one of the most prominent individuals in the crypto industry, is stepping down from his position at Binance as he pled guilty to violating anti-money laundering regulations, although he will still retain majority ownership of Binance.

Binance's $4.3 billion fine ranks as the 7th largest financial compliance fine in history pic.twitter.com/CIxx0ZdO6x

— Alex Krüger (@krugermacro) November 21, 2023

These developments have initially been received by some in the crypto space as potentially long-term bullish for the market, as they establish certainty, and come as the crypto sector is charging up for the possibility of ETFs launching during a Bitcoin halving year. There is also speculation that the ground has been cleared for crypto to integrate with traditional finance.

Furthermore, for Zhao to step down at Binance at around the same time as the criminal trial of the Founder of FTX, Sam Bankman-Fried, concluded, reinforces the sense of a curtain being drawn on a chaotic, meme-driven, and at times lawless period in crypto history, although what comes next, remains to be seen.