Kraken, one of the world’s largest cryptocurrency exchanges, is under federal investigation, suspected of violating US sanctions by allowing users in Iran and elsewhere to buy and sell digital tokens, according to five people affiliated with the company or with knowledge of the investigation.
The Treasury Department’s Office of Foreign Assets Control has been investigating Kraken since 2019 and is expected to impose a fine, said the people, who declined to be identified for fear of retaliation by the company. Kraken would be the largest US crypto firm to face enforcement action under OFAC sanctions against Iran, which the United States imposed in 1979 prohibits the export of goods or services to individuals or entities in the country.
The federal government has increasingly cracked down on cryptocurrency companies, which are lightly regulated, as the market for digital currencies has grown. Tether, a stablecoin company, was fined by the Commodity Futures Trading Commission for misstatements about its reserves last year, while the Justice Department filed insider trading charges this month against a former employee of Coinbase, the largest US crypto exchange. USA
Industry scrutiny has increased in recent months as the crypto market crashed and several companies, such as Voyager Digital and Celsius Network, collapsed.
Kraken, a private company valued at $11 billion that allows users to buy, sell or hold various cryptocurrencies, has previously faced regulatory action. Last year, the CFTC imposed a fine of $1.25 million against the company for a prohibited business service.
In an internal conversation about employee benefits in 2019, Jesse Powell, CEO of Kraken, suggested that he would consider breaking the law in a wide range of situations if the benefits to the company outweigh the potential penalties, according to messages seen by The New YorkTimes. The company has also been dealing with internal conflicts over issues including race and gender, which were stoked by Powell.
Marco Santori, Kraken’s chief legal officer, said the company “does not comment on specific discussions with regulators.” He added: “Kraken closely monitors compliance with sanctions laws and generally reports even potential issues to regulators.”
A Treasury spokeswoman said the agency “does not confirm or comment on potential or ongoing investigations” and pledged to apply “sanctions that protect the national security of the United States.”
Sanctions are some of the most powerful tools the United States has to influence the behavior of nations it does not consider to be allies. But cryptocurrencies pose a threat to sanctions because digital currencies do not flow through the traditional banking system, making the funds more difficult for the government to control.
In October, the Treasury Department warned that cryptocurrencies “potentially reduce the effectiveness of US sanctions.” Launched a 30-page fulfillment Handbook that recommended cryptocurrency companies use geolocation tools to remove clients in restricted regions.
“The fact that cryptocurrencies can move without a bank or intermediary means that exchanges are responsible for certain types of financial regulatory compliance,” said Hailey Lennon, an attorney at Anderson Kill who handles crypto regulatory affairs.
Kraken and the issue of sanctions came up in a November 2019 lawsuit from a former finance department employee, Nathan Peter Runyon, who accused the startup of generating revenue from accounts in sanctioned countries. He said he brought the matter up with Kraken’s chief financial officer and chief compliance officer in early 2019, according to legal documents. (The lawsuit was settled last year.)
That same year, OFAC began investigating Kraken, focusing on the company’s accounts in Iran, people familiar with the investigation said. Kraken clients also opened accounts in Syria and Cuba, two other countries under US sanctions, the people said.
In 2020, OFAC fined BitGo, a digital wallet service with an office in Palo Alto, California, more than $98,000 in 2020 for 183 apparent sanctions violations. Last year he fined BitPay, an Atlanta-based crypto payment processor, over $500,000 for 2,102 apparent violations. Coinbase also revealed in a 2021 financial filing that it sent notices to OFAC flagging transactions that may have violated sanctions, although the agency has not taken any enforcement action.
Mr. Powell co-founded Kraken in 2011 and was an early proponent of Bitcoin, a digital currency that was marketed as free from any government influence or regulation.
In 2019, Powell discussed parental leave on Kraken on Slack, according to messages seen by The Times. Mr. Powell said paternity leave was a burden on the company because a child “might as well be a second job, a distracting hobby or a harmful addiction” and “it’s something outside of work that has a negative impact on the worked”.
The conversation soon turned to a discussion of legal requirements. Mr Powell said that in his “formula for everything”, it was important to consider whether “not following the legal requirement is worth the risk”. He added: “Not following the law would by default be ‘ill-advised,’ but should always be considered as an option.”
Powell did not respond to an email requesting comment.
This year, Mr. Powell was one of the loudest voices in the crypto industry resisting calls to close accounts in Russia after it invaded Ukraine. The United States has sanctioned some people and companies in Russia, but has not required crypto companies to cut off access to the country entirely.
Until last month, it appeared that Kraken was still servicing accounts in sanctioned countries like Iran, according to a spreadsheet Powell posted to a company-wide Slack channel to show where the company’s customers were located. He said the data came from residence information listed in “verified accounts.”
The spreadsheet said that Kraken had 1,522 users residing in Iran, 149 in Syria and 83 in Cuba, according to figures seen by The Times. The company also had more than 2.5 million users residing in the United States and more than 500,000 in Great Britain. The spreadsheet soon became unavailable to most employees.