Kraken has ended a privacy and cost-saving feature for some of its customers. Since April 2022, the crypto exchange had supported withdrawals into Bitcoin’s most popular ‘layer 2,’ the Lightning Network. However, as of September 10, Kraken has discontinued support for Lightning withdrawals in Germany.

In its list of acceptable address types for BTC withdrawals, Kraken has removed the ‘lnbc’ prefix from its list of supported assets for German customers. That confirms Kraken’s denial of Lightning withdrawals, yet Kraken never published a dedicated statement in plain English about disabling its Lightning Network support in Germany.

In response to a single customer inquiry, a support agent at Kraken attributed the removal to “regulatory issues,” offering a consolation, “as soon as we are able to bring back the service, we will.”

The Lightning Network is a mesh network of users who maintain ‘bar tab’-like ledgers of off-blockchain BTC transactions. It can process approximately 5,200 BTC and boasts faster, cheaper transaction times.

Importantly, by moving transactions off Bitcoin’s blockchain, many German customers used the Lightning Network for its privacy features.

Aside from Germany, Kraken is also wrestling with legal issues in its home country. The SEC is suing Kraken for operating an allegedly unregistered securities exchange. That lawsuit is quickly advancing toward jury trial in California.

A spokesperson for Kraken provided the following clarification regarding the incident. “After investigation of the issue, we found that Kraken Support incorrectly cited regulatory changes as the reason for halting Lightning support in the German market. The change of service for German clients wanting to use Lightning is the result of technical changes. While we always strive to provide the best and most innovative services to our clients, we unfortunately sometimes have to make tough decisions to ensure we can offer a reliable and secure platform for as many clients in Germany as possible.”

Update 21:41 UTC, Sept 14: Added quote from Kraken spokesperson.

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Kraken co-founder Jesse Powell has apparently made the same mistake as the Winklevoss Twins and made a $1 million donation to Donald Trump’s election campaign despite the legal limit for a single-person donation being $844,600.

Powell made the donation, which he claims was made up of mostly ether, earlier today but there’s a chance a good chunk of that could be refunded. As reported by Bloomberg last week, each of the Winklevoss Twins was refunded the excess amount of $155,400.

Protos has reached out to Kraken to clarify whether or not Powell’s $1 million donation broke the legal limit.

Last November the Securities and Exchange Commission (SEC) accused Kraken of operating an unregistered securities exchange. It alleges that it made ‘hundreds of millions of dollars’ by unlawfully selling crypto tokens the commission deems as securities.

Powell, who swapped his CEO role for the position of board chairman, called the charges against the exchange “another attack on America.”

He has since joined crypto proponents in backing Trump’s campaign as the former president seemingly adopts a pro-crypto stance (a change from calling it a scam five years ago). The Joe Biden campaign has also changed its tune on crypto, reportedly seeking guidance on ‘crypto community and crypto policy moving forward.’

Read more: Joe Biden is suddenly pro-crypto after Trump embraces it

When Powell announced the donation he said, “I am excited to join other leaders from our community to unite behind the only pro-crypto major party candidate in the 2024 Presidential election so the United States can continue to remain a leader in blockchain technology.”

Despite the ‘pro-crypto’ endorsement, crypto reportedly wasn’t mentioned during last night’s Donald Trump v. Joe Biden election debate.

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Notorious crypto audit firm CertiK’s security ‘researchers’ spent five days gaming Kraken’s systems before alerting the exchange, according to public statements from both companies

Facing significant backlash from the crypto security community, CertiK claims to have returned the funds, despite apparently not having been provided with a repayment address.

Although both companies have provided detailed statements on their own versions of events, some questions remain on both sides.

Kraken’s chief security officer Nick Percoco took to X (formerly Twitter) to describe the highly irregular nature of the disclosure. The initial communication reported having generated a $4 discrepancy, which Percoco says would have been sufficient to qualify for Kraken’s bug bounty program.

Read more: Crypto security firms more concerned with social media clout than the details

On further inspection, however, it soon became clear that almost $3 million had been withdrawn via the vulnerability. Shockingly, when asked to disclose further details and organize the return of funds, Percoco says CertiK refused, insisting on negotiating via its business development team.

Percoco ends his thread by stating that Kraken is treating the incident as a criminal case, though he neglects to name the company so as not to credit it with the discovery.

Some three hours later, CertiK took responsibility. The sequence of events it describes mirrors the ‘hack first, negotiate a bounty later’ approach that has become a standard practice for ‘blackhats’ in decentralized finance (DeFi).

CertiK has argued that its investigation aimed to explore Kraken’s internal security alert system, which it says wasn’t triggered by even the larger transactions. However, it remains unclear why this work wasn’t conducted in collaboration with Kraken’s team.

It also claims that Kraken demanded “a MISMATCHED amount of crypto in an UNREASONABLE time even WITHOUT providing repayment addresses.”

After facing criticism, ridicule, and disbelief in describing its actions as ‘whitehat operations,’ CertiK clarified that “all funds that we held have been returned, but the total amount differs from what Kraken commanded. We based the return on our records.” The firm goes on to claim that it was never interested in securing a bounty payment.

Full disclosure?

While CertiK’s version of events has the ‘research’ beginning on June 5, on-chain investigators have identified related transactions from the disclosed addresses beginning over a week earlier, on May 27.

Metamask’s Taylor Monahan identified a suspicious pattern amongst the ‘research’ transactions of withdrawing USDT, swapping for ETH and sending to ChangeNOW.

This is a common set of steps used by hackers who know that centralized stablecoins such as USDT can be frozen by their issuers. ChangeNOW is a crypto exchange that doesn’t require users to pass know-your-customer (KYC) checks, often used by ‘blackhats’ to cash out stolen funds.

Read more: Hackers switching to centralized exchanges to fund crypto attacks 

Concerns were also raised over the transaction history of the addresses involved, at least one of which had previously deposited funds into sanctioned crypto mixer Tornado Cash. However, it was later clarified that these transactions didn’t include funds withdrawn from Kraken, and were likely meant to test the exchange’s identification of suspicious addresses, which seemingly weren’t flagged.

In addition, Percoco’s statement that “no client’s assets were ever at risk” raises its own questions. Claiming that only treasury funds were affected, while funds were withdrawn through addresses servicing customer deposits and withdrawals would imply commingling of funds. 

Burned reputation

CertiK has long been the butt of jokes in the crypto security sector. Multiple projects have been hacked after passing security checks by the firm, and its own X account was compromised to spread a phishing scam earlier this year.

Read more: X account of crypto auditing firm CertiK hacked 

Some have even registered their surprise that CertiK was able to pull off such a feat while casting suspicions over previous incidents.

Assessing the fallout from this latest gaffe, which may well land CertiK in legal trouble, it would seem its already-tarnished reputation couldn’t get any worse.

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Binance and Kraken are among at least nine crypto exchanges that have had their apps pulled from Apple’s App Store in India after the country’s government accused them of not adhering to its anti-money laundering rules.

As reported by TechCrunch, Huobi, Bitfinex, and Bittrex were also issued show cause notices by India’s Financial Intelligence Unit (FIU), the government body responsible for looking into financial transactions.

The apps are still available to users who have already downloaded them and are still available to download via the Google Play Store.

Read more: Over 1,000 Indian police caught up in $240M crypto scam

India’s main bank already tried blanket crypto ban

As detailed by TechCrunch, Indian authorities have been accused of driving the country’s traders to global or non-compliant services through its implementation of new tax laws.

Last year, India began levying a 30% tax on gains and a 1% deduction on every single crypto transaction.

The Reserve Bank of India has previously attempted to ban cryptocurrencies altogether, with senior figures likening the class to a Ponzi scheme. However, the move was eventually blocked by India’s Supreme Court.

Earlier this week, Indian crypto platform CoinDCX, which was one of the first to warn the Indian government of the effects of its new tax laws, promised to reward customers who move their crypto from global exchanges to its India-based platform.

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The Securities and Exchange Commission (SEC) has been labeled America’s “top decel” by the CEO of its latest target: crypto exchange Kraken.

“Today, the SEC filed a complaint alleging that Kraken operates as an unregistered national securities exchange, broker, and clearing house,” the firm announced via X on Monday night.

“We disagree with their claims and plan to vigorously defend our position.”

According to the SEC, Kraken has made “hundreds of millions of dollars” by unlawfully selling crypto tokens the commission deems as securities. By doing so, it failed to provide “significant protections” to investors.

These protections were further eroded by Kraken’s “deficient” business practices — poor internal controls and recordkeeping left users exposed to “a range of risks,” the SEC believes.

Former Kraken chief gets personal in SEC dispute

In response to the SEC’s complaint, Kraken’s former chief exec Jesse Powell called it “another attack on America.” In the heated post on X (formerly Twitter), the commission earned the CEO’s personal award for “USA’s top decel” — meaning tech doomsayer.

“The masochists haven’t been happy with the beatings they’ve been taking in NY and are shopping for a different flavor of RegDom in CA,” Powell wrote.

The Kraken chief continued with a warning for smaller crypto firms to leave the US before the SEC comes knocking on their door, too.

“The SEC knows that a real fight will likely cost $100m+, and valuable time. If you can’t afford it, get your crypto company out of the US warzone.”

Read more: Kraken founder promoted Custodia’s doomed bank and stablecoin

Kraken has been hit by the SEC before, for offering unregistered securities through crypto lending and staking programs as part of a joint crackdown with other crypto firms. It settled for $30 million.

While the SEC alleges Kraken deliberately skirted laws to “reap” hundreds of millions from investors, the crypto exchange believes that the commission has failed to provide a “clear path to registration.” In Kraken’s firm response to the complaint, it called on Congress to provide that much-needed regulatory clarity.

“It is disappointing to see the SEC continue down its path of regulation by enforcement, which harms American consumers, stunts innovation and damages U.S. competitiveness globally,” Kraken added.

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The US Federal Reserve rejected Custodia Bank’s application for a master account on January 27. Last week, it released a document explaining its reasoning for the rejection.

Like Kraken founder Jesse Powell, many fans of Custodia (formerly Avanti) praised its fully backed, non-fractional reserve banking application. However, almost no one spoke about Custodia’s shadowy plan to mint its own stablecoin with “implicit backing” from the Fed that would, according to regulators, add “a new, meaningful, volatile source of demand for Federal Reserve liabilities.”

Aside from Custodia’s founder Caitlin Long, the bank had no bigger cheerleader than Powell. Indeed, he tweeted his support for Custodia regularly.

Unsurprisingly, he has a long history of supporting other shadowy stablecoins, especially Tether.

Jesse Powell’s advocacy for Tether

Tether has a long, curious history with Powell and Kraken. For significant periods, Kraken offered the only USD-denominated trading pair for Tether on any publicly-quoted market.

Despite years of lies by Tether executives, Powell has been a staunch proponent of the so-called stablecoin since 2018.

Read more: Tether transparency: A lesson in lying

Kraken would also allow Tether traders to blow out any possible short positions priced using Kraken’s USD reference price for Tether (many OTC and derivative financial products use reference pricing from major exchanges like Kraken). On May 11, 2019, for example, Tether traded at $1,000 per USD on Kraken.

Allowing further thrashing of bets against Tether’s peg, on May 12, 2022, Tether traded at $0.92 per USD on Kraken. The exchange processed a staggering $1 billion worth of Tether transactions at various prices throughout that single day.

As the founder of one of the industry’s oldest exchanges and with experience working for Mt. Gox itself, Powell’s support for Custodia led many to believe in the merits of fully reserved banking.

However, there are few examples of non-fractional reserve banks, which generate little profit and struggle to compete with other banks with access to favorable leverage into fixed-income markets. Despite Powell’s endorsements, fully backed bank accounts are not a reality of modern life.

Instead, Custodia planned to earn profit in other, less conventional ways.

Destined for failure

The Federal Reserve’s rejection letter refers to Custodia’s description of itself as “a compliant bridge” between digital assets and the mainstream payments system.

Custodia also shot itself in the foot by inviting greater scrutiny of its application and the fact that it didn’t seek deposit insurance with the Federal Deposit Insurance Corporation (FDIC).

In addition, the Fed expressed concern about Custodia’s lack of risk management protocols and its novel financial offerings. Authorities especially cited Custodia’s focus on digital assets — including its plan to issue its own digital token. 

As expected, the Federal Reserve noted digital assets’ association with “illicit finance” and “safety and soundness risks.”

Custodia had planned to issue a stablecoin called Avit, something the Fed derided. It said Custodia could plan to hold its Avit reserves in its Fed-supported master account, creating the impression that it had “implicit backing” by the central bank.

This could create the veneer of legitimacy needed to scale quickly and enable pseudonymous blockchain transactions with perceived backing by the US government.

Custodia pushed back, claiming that it planned to hold $1.08 in cash for every dollar of Avit outstanding. It said keeping excess reserves should have reduced concerns about bank runs. Custodia planned to be able to cover all withdrawals in full, without issues suffered by recently-failed banks like Credit Suisse or Silicon Valley Bank.

In June 2022, Custodia filed a lawsuit challenging the Federal Reserve’s delay in approving its master account application. It updated that suit with an amended complaint in February 2023. The Federal Reserve’s decision to publish its reasoning for the rejection in public is a likely response to their lengthy delay.

Read more: Federal Reserve ‘illegally’ delaying Kraken’s master bank account, says Senator

Why Custodia Bank sought master account approval

Some banks have master accounts with the Federal Reserve. Approval elevates their offering from growing on a state-by-state basis to a truly national service.

The Congressional Research Service describes master accounts as one major motivation to seek a federal bank charter. Its report, Federal Reserve: Master Accounts and the Payment System, mentions the risks of digital asset banks with state bank charters applying for a federal charter.

Federal bank charters, which come with access to master accounts, can enable seamless transactions between digital assets and the US dollar. Banks typically use master accounts to hold their cash reserves and use wholesale payment systems to settle payments.

The report refers to the speed at which the Federal Reserve can approve traditional banks’ applications for a federal bank charter. Non-traditional financial services often face delays or, like Custodia, get rejected.

The Federal Reserve attempted to make the application process more transparent with guidance published in August 2022. However, it also had to reconsider eligibility requirements for a federal charter with the rise of non-traditional banks.

Caitlin Long and Jesse Powell complain

For her part, Caitlin Long expressed frustration with financial regulators. She claims she attempted to alert authorities about illegal activity and potential bank runs only for her warnings to be lost in a bureaucratic maze. She claims Senator Richard Durbin placed her and Custodia in the same group as FTX founder Sam Bankman-Fried in comments he made on the Senate floor.

Powell says he similarly tried to warn federal authorities about illegal activity only to be brushed off. He claims the authorities said they were “watching everybody” but were limited in what they could do because the parties he warned about were offshore entities.

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Crypto exchange Kraken has agreed to pay $30 million and discontinue offering staking-as-a-service in the US, in order to settle charges of offering an unregistered security with the Securities and Exchange Commission (SEC).

The complaint against Kraken details how the SEC feels that the pooling of staking user assets and efforts to derive profits for them results in the staking product being a security.

Kraken provided a statement to Protos that noted it was only required to end the program for US clients. “Starting today, with the exception of staked ether (ETH), assets enrolled in the on-chain staking program by US clients will automatically be unstaked and will no longer earn staking rewards,” a spokesperson told Protos.

As part of its settlement, Kraken neither admits nor denies the allegations of the SEC.

Read more: Kraken shutters Abu Dhabi office a year after gaining license

On Wednesday, Coinbase chief Brian Armstrong tweeted about the “rumors” he had been hearing about the SEC’s intention to pursue entities who had offered staking-as-a-service. “I hope that’s not the case as I believe it would be a terrible path for the US if that was allowed to happen,” he commented.

However, SEC chairman Gary Gensler has previously suggested that staking products could be a security.

This effort seems to be part of the SEC broadening its enforcement actions in the cryptocurrency ecosystem.

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The Securities and Exchange Commission (SEC) is almost done investigating major crypto exchange Kraken for potential unregistered securities sales, a person familiar with the matter told Bloomberg.

A settlement could be expected in the ‘coming days,’ the outlet reports, yet it remains unclear which tokens or offerings are under the US regulator’s scrutiny.

The exchange has historically battled with a less than reputable public image — from concerning reports of workplace harassments to suing employees for leaving honest reviews on Glassdoor.

• Its co-founder Jesse Powell stepped down from his role as CEO in September.
• By late November, Kraken settled with the Treasury’s Office of Foreign Assets Control after a three-year long investigation for potentially violating US sanctions against Iran.
• It paid $362,000 and agreed to invest a further $100,000 into sanctions compliance controls.

Kraken chief of strategy gives PR spiel one hour before SEC leak

Now, news of the ongoing probe comes as Kraken struggles to stay afloat amidst a brutal crypto winter. Its head of strategy, Thomas Perfumo, appeared on CoinDesk TV right before Bloomberg broke the story of the SEC investigation — which, until now, has been kept under wraps. The exchange isn’t “insulated from the broader macro and economic environment,” Perfumo said, adding that crypto winter “definitely had an effect on the business.”

Indeed, Kraken laid off 30% of its employees — 1,100 staff — in November. It closed its Abu Dhabi office less than a year after securing a local license and plans to leave Japan, as well.

Read more: Kraken chief Jesse Powell steps down before possible stock market debut

Perfumo told CoinDesk that Kraken is narrowing its scope to some parts of the business that “are likely to drive the greatest amount of impact.” Its goal is to rebuild “trust and reputation within the industry,” he said, just an hour before the SEC probe hit the internet.

Last year, the Commodities Futures Trading Commission (CFTC) found Kraken had failed to register as a Bitcoin futures merchant and was illegally selling crypto margin products. Kraken agreed to pay a $1.25 million fine.

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US-based crypto exchange Kraken is shuttering its Abu Dhabi office as part of its ongoing global cost-cutting measures, reports Bloomberg.

The move means that transactions in Dirham, the country’s official currency, will no longer be allowed. However, customers from the region will still be able to use the platform.

The company took the decision less than 12 months after gaining a local license. Kraken no longer shows up in the registry for Abu Dhabi Global Market (ADGM).

The firm has slashed the majority of its workforce in the MENA region and, according to a Kraken spokesperson, these cuts will affect somewhere in the region of eight roles.

Closure just the latest of Kraken’s Middle East struggles

Back in November, Kraken agreed to pay more than $460,000 to settle civil liability related to allegations that it violated US sanctions by allowing Iranian users to trade digital tokens on the platform.

Read more: Binance u-turns on Russian trading ban, Kraken remains steadfast

As part of the settlement with the Office of Foreign Assets Control (OFAC), Kraken was ordered to pay a fine of $362,000, and invest a further $100,000 in various sanctions compliance controls.

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Coinbase has agreed to cough up a total of $100 million to bring an end to an investigation into failures of its anti-money laundering (AML) and know-your-customer (KYC) measures.

The exchange announced on Wednesday that it will pay $50 million to the New York Department of Financial Services (NYDFS) and will invest the same amount in bringing these programs up to standard.

Shortcomings in Coinbase’s compliance measures became apparent when the price of bitcoin surged to over $60,000 in 2021. As reported by NBC, by the end of that same year, the exchange was sitting on 100,000 unreviewed transaction monitoring alerts and had 14,000 customers who required enhanced due diligence procedures.

In a statement, NYDFS superintendent Adrienne Harris said, “Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth (our emphasis).

“That failure exposed the Coinbase platform to potential criminal activity requiring the Department to take immediate action including the installation of an Independent Monitor.”

According to the NYDFS, this criminal activity included an ex-Coinbase employee, who had previously been charged with child sexual abuse crimes, carrying out a number of suspicious transactions. It apparently took Coinbase more than two years to uncover this activity.

In its own statement, Coinbase says, “We view this resolution as a critical step in our commitment to continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space – for ourselves and others.”

Read more: Lawsuit says Coinbase ignored red flags before user’s wallet was drained

Kraken also fined but spot the difference

Another of the world’s most popular exchanges, Kraken, has also been fined for operating less than robust compliance programs. The company was ordered to pay out $462,000 to settle a number of issues concerning violations of sanctions on Iran.

The exchange will pay the fine to the US Treasury Department’s Office of Foreign Assets Control (OFAC) after it processed more than 800 transactions for users in Iran between October 2015 and June 2019.

Kraken reportedly had controls in place to prevent Iranian users from opening accounts but had no way of blocking IP addresses based on location.

After the fine was imposed, Kraken told Reuters:

“Kraken is pleased to have resolved this matter, which we discovered, voluntarily self-reported and swiftly corrected.

Of course, it must be noted that the circumstances surrounding Coinbase and Kraken’s penalties are very different. Not only that, the two have been sanctioned by two different regulators. Indeed, OFAC has a history of handing out fines to crypto exchanges that are far less than the massive penalties imposed by the NYDFS.

In December 2020, the regulator fined California-based BitGo nearly $99,000 for sanctions violations, and a couple of months later ordered Atlanta-based BitPay to pay over $500,000 for the same offense.

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