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 associated with the company affiliated with or with knowledge of the research.
The Treasury Department’s Office of Foreign Assets Control has been investigating Kraken since 2019 and is expected to impose a fine, the people said, who 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, which the United States imposed in 1979 and banned the export of goods or services to people or entities in the country.
The federal government has been cracking down on crypto companies, which are lightly regulated, as the digital currency market has grown. Tether, a stablecoin company, was fined by the Commodity Futures Trading Commission last year for misrepresenting its reserves, while the Justice Department this month filed an insider trading suit against a former employee of Coinbase, the largest US crypto exchange.
Industry oversight has increased in recent months as the crypto market collapsed and several companies, such as Voyager Digital and Celsius Network, collapsed.
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 for a banned trading service.
In an internal conversation about employee benefits in 2019, Kraken CEO Jesse Powell suggested he would consider breaking the law in a wide variety of situations if the benefits to the company outweigh potential sanctions, according to reports from The New York Times. The company has also faced internal conflicts over issues such as race and gender, fueled by Mr 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 even reports potential problems to regulators.”
A Treasury Department spokeswoman said the agency “will not confirm or comment on potential or pending investigations” and is committed to enforcing “sanctions that protect U.S. national security.”
Sanctions are some of the most powerful tools the United States has to influence the behavior of countries it does not consider allies. But cryptocurrencies pose a threat to sanctions because the digital coins 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 “may reduce the effectiveness of US sanctions”. It has released a 30-page compliance guide recommending that cryptocurrency companies use geolocation tools to disable customers in restricted regions.
“The fact that crypto can move without a bank or intermediary means that exchanges are responsible for certain types of compliance with financial regulations,” said Hailey Lennon, an attorney at Anderson Kill who handles regulatory issues in crypto.
Squatting and the issue of sanctions came to light in a lawsuit in November 2019 by a former employee of the finance department, Nathan Peter Runyon, who accused the start-up of monetizing accounts in countries under sanctions. He said he referred the matter to Kraken’s Chief Financial Officer and Top Compliance Officer in early 2019, according to legal documents. (The suit was settled last year.)
That same year, OFAC began investigating Kraken, focusing on the company’s accounts in Iran, those familiar with the investigation said. Kraken’s customers have 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 clear violations of sanctions. Last year, it fined BitPay, an Atlanta-based crypto payment processor, in excess of $500,000 for 2,102 clear violations. Coinbase also disclosed in a 2021 financial filing that it had sent notices to OFAC flagging transactions that may violate sanctions, though 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 marketed as free of any government influence or regulation.
In 2018, the New York Attorney General’s office asked Kraken and 12 other exchanges to answer a questionnaire about their activities. Kraken declined to respond and Mr. Powell called New York “hostile to business” on Twitter.
In 2019, Mr Powell got into an argument on Slack over parental leave at Kraken, according to reports reviewed by The Times. Mr Powell said parental leave was a burden to the company because having a child “could be a second job, a distracting hobby, or a harmful addiction” and “is something outside of work that negatively impacts work.”
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 it is “worth the risk of not following the legal requirement”. He added: “Not following the law would be ‘unwise’ by default, but it should always be considered an option.”
Mr Powell did not respond to an email asking for comment.
This year Mr. Powell one of the loudest voices in the crypto industry who resisted calls to close 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.
Last month, Kraken appeared to still be serving accounts in countries under sanctions, such as Iran, according to a spreadsheet Mr Powell posted to a company-wide Slack channel to show where the company’s customers were. He said the data came from residence details listed on “verified accounts.”
The spreadsheet said that Kraken had 1,522 users with properties in Iran, 149 in Syria and 83 in Cuba, according to figures from The Times. The company also had more than 2.5 million residential users in the United States and more than 500,000 in Britain. The spreadsheet soon became unavailable to most employees.