I find following more troubling:

> As alleged in the complaint, Kraken commingles its customers’ money with its own, including paying operational expenses directly from accounts that hold customer cash.

Didn't FTX/SBF do same?

What's interesting this time around is Kraken has fully bought into audits and cryptographic proof of reserves (complete with sample Python code to verify your account balance is included in the proof tree).

https://www.kraken.com/proof-of-reserves

https://proof-of-reserves.trustexplorer.io/clients/kraken

If there's any crypto company out there that "gets it" and is doing things right, it's them. The SEC is going after the big one this time. I can't wait to see how it shakes out.

The link you sent shows a 1.5 year old snapshot. So much for twice a year.

Kraken addressed this point in their blog post replying to these allegations. They're not doing this at all.

If they're doing it, they're clearly going to say that they're not.

Is that inherently problematic, as long as they're accounting properly?

Every regulation comes from some past scam. Clearly there must have been enough "oopsies" in the past attributed to commingled assets that regulators said "no more".

Yes. Because they're gambling with the customers' money.

That seldom ends well.

Comingling doesn't imply gambling.

I could borrow $10 from Jim, and $20 from Sue, and deposit them both into the same Chase account which now has $30. As long as the balance stays above $30, everything is fine.

You could let the balance fall below $30 in your example because it’s a loan (“borrow”), not a deposit.

If you’re claiming to hold the funds on their behalf and do otherwise (like “investing” them in your less than arm’s length hedge fund), then you’re breaking your fiduciary obligations.

Right, the problem is when leverage and borrowing comes in

If customers are aware of it, maybe not. But if they're representing to customers that these are their funds, expressly or implicitly claiming that they're held separately, then that would be inherently problematic - it means those customers are a lot worse off if Kraken goes bankrupt, because if Kraken has been paying operational expenses out of those accounts then their suppliers etc. can go after those accounts. (And no, the regulators won't treat it as a "no harm no foul" just because Kraken didn't in fact go bankrupt - they were exposing their customers to risk even if that risk didn't come to pass)

I would be more surprised by a crypto exchange that doesn't. Except for maybe Coinbase, none of these places take compliance seriously.

Yes, and so did MtGox and QuadrigaCX. It doesn't mean that they are unbacked but it is a huge red flag.

Kraken's response was

> The SEC alleges that Kraken “commingled” its own funds with its clients’. This is a similar allegation already made of other crypto trading platforms. 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.*

https://blog.kraken.com/news/kraken-continues-to-fight-for-i...