Kraken, one of the largest cryptocurrency exchanges in the world, is reportedly under investigation. The exchange is suspected of violating US sanctions by allowing users in Iran and elsewhere to buy and sell digital tokens.
Potential fine
The information comes from five people who have worked at the company or have knowledge of the investigation. The US Treasury Department’s Office of Foreign Assets Control has been investigating Kraken since 2019 and is expected to fine them. The five people declined to be identified for fear of retaliation from the company.
Kraken would be the largest US crypto company to face an enforcement action by OFAC. Sanctions against Iran, imposed by the United States in 1979, prohibit the export of goods or services to people or entities in the country.
The federal government is cracking down on crypto companies as the market grows. Tether, a stablecoin company, was fined by the Commodity Futures Trading Commission last year for misrepresenting its reserves. The Justice Department filed a lawsuit this month for insider trading. It did this against an ex-employee of Coinbase, the largest US crypto exchange.
Industry oversight has increased in recent months as the crypto market collapsed. Several companies, such as Voyager Digital and Celsius Network, have gone bankrupt.
Complying with the Laws
Kraken, an $11 billion privately held company that allows users to buy, sell or hold various cryptocurrencies, has previously faced regulatory action. Last year, the CFTC fined the company $1.25 million.
In an internal conversation about employee benefits in 2019, Kraken CEO Jesse Powell suggested he would break the law in a wide variety of situations if the benefits to the company outweigh the potential sanctions. The company has also faced internal conflicts over issues such as race and gender, sparked by Powell.
Marco Santori, Kraken’s chief legal officer, said the company will not comment on specific discussions with regulators. He added:
Kraken closely monitors compliance with the laws. In addition, Kraken generally even reports the potential problems to regulators.
A spokeswoman for the Treasury Department said it would not confirm or comment on possible or ongoing investigations. It is committed to enforcing sanctions that protect U.S. national security.
The United States can influence the behavior of countries it does not consider allies with sanctions. However, cryptocurrencies pose a threat to sanctions because the digital coins do not flow through the traditional banking system. This makes the funds more difficult for the government to control.
In October, the Treasury Department warned that cryptocurrencies “may reduce the effectiveness of US sanctions”. It has released a 30-page compliance guide recommending that cryptocurrency companies use location tools to disable customers in certain regions.
The fact that crypto can move without a bank or intermediary means that exchanges are responsible for complying with financial regulations.
Said Hailey Lennon, an attorney at Anderson Kill who handles regulatory issues surrounding crypto.
Accusation of a former employee
Kraken came to light in a lawsuit in November 2019 by an indictment of a former employee, Nathan Peter Runyon. Nathan accused the startup of generating revenue from countries under sanctions. He said he referred the matter to Kraken’s Chief Financial Officer and Top Compliance Officer in early 2019.
That same year, OFAC started its investigation into Kraken. It focused on the company’s accounts in Iran. Kraken’s customers have also opened accounts in Syria and Cuba, two other countries under US sanctions.
In 2020, OFAC fined BitGo, a digital wallet service with an office in Palo Alto, California, more than $98,000 for 183 violations. Last year, it fined BitPay, an Atlanta-based crypto payment processor, more than $500,000 for 2,102 violations.
Coinbase revealed in a 2021 financial filing that it had sent notices to OFAC flagging transactions that may have violated sanctions. However, the agency has not taken any action.
Jesse Powell, co-founder of Kraken
Jesse Powell was one of the co-founders of Kraken in 2011, and an early proponent of Bitcoin.
In 2018, the agency asked Kraken and 12 other exchanges to complete a questionnaire about their activities. Kraken declined to comment, and Powell called New York “hostile to their business” on Twitter.
In 2019, Powell got into an argument on Slack over parental leave at Kraken, according to reports viewed by the Times. Powell said parental leave was a burden on the company, as having a child can be either a second job, a distracting hobby or a harmful addiction. According to him, a child is something outside of work that has a negative influence on work.
The conversation soon turned to a discussion of legal requirements. Powell said it was important for him to consider whether it is worth the risk of not following the legal requirement. He added:
Not following the law would generally be unwise, but it should always be considered an option.
This year, Powell was one of the loudest voices in the crypto industry. He opposed calls to shut down accounts in Russia after it invaded Ukraine. The United States has imposed sanctions on some individuals and companies in Russia, but it has not obliged crypto companies to completely cut off access to the country.
According to a spreadsheet Powell posted to a Slack channel to show where the company’s customers came from, Kraken appeared to continue to serve accounts in countries under sanctions, including Iran, last month.
The spreadsheet showed that Kraken had 1,522 users with properties in Iran, 149 in Syria and 83 in Cuba, according to figures from the Times. However, the spreadsheet soon became unavailable to most employees.