Kraken, a major crypto firm eyeing Wyoming, at center of blockbuster lawsuit
A cryptocurrency company in line to open one of Wyoming’s first cryptobanks has been accused of falsifying addresses on their banking applications in California, potentially jeopardizing their plans to do business in the Equality State.
Executive officers for Kraken, a San Francisco-based cryptocurrency exchange, allegedly used an employee’s address to falsify business records – a direct violation of federal banking regulations – and maintained account balances millions of dollars less than the sum of its total deposits which, if proven true, would amount to a significant violation.
The allegations were contained in a workplace discrimination lawsuit filed in a court in San Francisco by a whistleblower within the company who, among other things, accused the company of operating in countries prohibited for commerce by the United States Treasury Department and maintaining an improper relationship between two members of Kraken’s executive leadership, potentially in violation of SEC regulations.
Claire Cochran, a Bay Area labor attorney who authored the lawsuit, said her client was not naive to the significance of the allegations, and that whistleblower protections in place in the state of California were partly to thank for the revelation of the violations.
“In these developing areas of tech and compliance, whistleblowers are very important,” Cochran said. “I’m not shocked that we’re here, but these companies have a duty to abide by the law and to protect people. People shouldn’t be punished unfairly for bringing those things to light.”
Representatives for Kraken declined to comment on the allegations in the lawsuit.
Wyoming has spent the past several years readily courting the blockchain and cryptocurrency sector, which has been seen as a potential source of economic development for the state. More than a dozen bills were recently passed this year alone — typically with input from industry insiders, a report from the news site WyoFile alleged — though some have questioned the safety and wisdom of the state opening its doors to the industry with little scrutiny.
Wyoming’s banking commissioner, Albert Forkner, said the state was taking the matter seriously.
“Protecting Wyoming is my number one priority,” he said in a statement to the Star-Tribune. “The allegations made in the lawsuit are serious, but unproven at this stage. As part of our bank chartering process, the Division of Banking and our federal colleagues will conduct a thoughtful investigation into the lawsuit. If Kraken applies for a SPDI charter, they must meet our rigorous standards for the prevention of money laundering and sanctions violations. They won’t do business in Wyoming unless the allegations are proven to be false.”
Kraken — a key player in the cryptocurrency movement — has been keen on building up a presence in Wyoming, which recently passed legislation allowing for the creation of Special Purpose Depository Institutions – or “SPDI” banks – within Wyoming’s borders. Kraken recently sponsored a “hackathon” at the University of Wyoming whose panelists promoted the benefits of doing business in Wyoming, and was one of a handful of firms rumored to be seeking licensure from the state to operate one of these banks.
It is unclear whether the allegations in the lawsuit would impact those plans. However, a rejection of the company’s application could be detrimental for Kraken, which boasts a significant presence in the crypto world. According to boosters for Wyoming’s SPDI program, Kraken’s operation in Wyoming would have potentially allowed the firm to operate around New York state’s onerous BitLicense money transfer requirements – a significant roadblock for cryptocurrency operations looking to do business in the nation’s financial capital.
“It’s not likely that a digital asset company operating in New York will have to have a BitLicense if they have an SPDI charter and open a New York branch of the Wyoming state bank,” Caitlin Long, a member of the state’s now-disbanded Blockchain Task Force (which helped craft the SPDI bank legislation) and a Kraken investor, said at an event in Manhattan last month.
As of last week, the firm was actively scouting for staff in anticipation of a potential move, according to a job posting on LinkedIn and, early on, the company remains confident that they will be allowed to proceed.
“We don’t intend to comment on the specific allegations made in the lawsuit,” a Kraken spokesperson said in a statement to the Star-Tribune. “However, we are engaging with the appropriate regulators who will have ample opportunity to review our books and records. We expect they will be satisfied with our financial and corporate controls.”
Wyoming’s SPDI regulations – though untested – contain numerous sideboards to prevent institutions covered under the law from engaging in the type of illegal activity alleged in the lawsuit, banking division attorney Chris Land wrote in an email.
In addition to being subject to what were described as “enhanced procedures” to prevent money laundering or other illicit activities that would reportedly exceed recommendations set by the Federal Financial Institutions Examination Council, Wyoming’s SPDIs would also be required to contract with a firm that screens every transaction they do for money laundering risk and the potential for doing business with people or nations sanctioned by the federal government – another charge contained in the lawsuit.
Following those rules – and submitting themselves to Wyoming’s strict compliance regulations – are paramount to cryptocurrency firms receiving their charters.
“The SPDIs have to have procedures in place to follow federal anti-money laundering and sanctions procedures,” Land wrote. “If they don’t have a strong plan in their application, they don’t get a charter. It’s that simple.”