krakenone of the world’s largest cryptocurrency exchanges, is under federal investigation for allegedly violating U.S. sanctions by allowing users in Iran and other countries to buy and sell digital tokens, according to five people associated 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 people who declined to be named for fear of retaliation from the company. Kraken will become the largest U.S. cryptocurrency firm to face the enforcement of OFAC sanctions against Iran that the United States imposed in 1979, banning the export of goods or services to individuals or entities in the country.
As the digital currency market grows, the federal government is increasingly cracking down on crypto companies that are loosely regulated. leashstablecoin company found Commodity Futures Trading Commission for misrepresenting its reserves last year, while the Department of Justice charged insider trading fees this month against a former employee of Coinbase, the largest US crypto exchange.
Kraken, an $11 billion private company that allows users to buy, sell or hold various cryptocurrencies, has faced regulatory action in the past. Last year, the CFTC charged $1.25 million fine against the company for a prohibited trading service.
According to reports seen by The New York Times, in an internal conversation about employee benefits in 2019, Jesse Powell, Kraken’s chief executive, suggested that he would consider breaking the law in a variety of situations if the benefits to the company outweigh the potential penalties. The company also dealt internal conflict over issues including race and genderwho were spurred on by Mr. Powell.
Marco Santori, Kraken’s general counsel, said the company “does not comment on specific discussions with regulators.” He added: “Kraken is closely monitoring enforcement of sanctions laws and tends to report even potential issues to regulators.”
A Treasury Department spokesman said the agency “does not confirm or comment on potential or ongoing investigations” and is committed to enforcing “sanctions that protect U.S. national security.”
Sanctions are one of the most powerful tools the US has at its disposal to influence the behavior of countries it does not consider allies. But cryptocurrencies pose a threat of sanctions because digital coins do not pass through the traditional banking system, making it difficult for the government to control the funds.
In October, the Ministry of Finance warned that cryptocurrencies “potentially reduce the effectiveness of US sanctions.” He released a 30 page match management who recommended that crypto companies use geolocation tools to weed out customers in restricted regions.
“The fact that crypto can move without a bank or intermediary means that exchanges have a responsibility to comply with certain types of financial regulation,” said Hayley Lennon, an Anderson Kill lawyer who focuses on crypto regulation.
Kraken and the issue of sanctions surfaced in November 2019 in a lawsuit by former finance officer Nathan Peter Runyon, who accused the startup of generating income from accounts in countries subject to sanctions. He said he took the matter to 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 launched an investigation into Kraken, focusing on the company’s accounts in Iran, people familiar with the investigation said. Kraken customers have also opened accounts in Syria and Cuba, two other countries under US sanctions, the sources said.
In 2020 OFAC fined BitGo, a digital wallet service based in Palo Alto, California, over $98,000 in 2020 for 183 clear sanctions violations. It ended last year BitPay, an Atlanta-based cryptocurrency payment processor, over $500,000 for 2,102 clear violations. Coinbase also said in its 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 positioned as free from any government influence or regulation.
In 2019, according to reports seen by The Times, Powell got into an argument on Slack over Kraken’s parental leave. mr. Powell said that parental leave was a burden on the company because a child “might as well be a second job, a distracting hobby or an addiction” and “it’s something outside of work that has a negative effect on work.”
The conversation soon turned to a discussion of legal requirements. mr. Powell said that in his “formula for everything” it is important to consider “whether it is worth the risk of not following the requirements of the law.” He added: “It would be ‘reckless’ to not comply with the law 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 was one of the loudest voices in the crypto industry is resisting calls to close accounts in Russia after its invasion of Ukraine. The United States has imposed sanctions against certain individuals and entities in Russia, but has not required crypto companies to completely stop access to the country.
As of last month, Kraken appeared to still be servicing accounts in sanctioned countries such as Iran, according to a spreadsheet Mr. Powell posted on a company-wide Slack channel to show where the company’s customers are. . He said the data is derived from residence information listed on “verified accounts.”
The spreadsheet says that Kraken had 1,522 users with residences in Iran, 149 in Syria, and 83 in Cuba, according to data released by The Times. The company also had over 2.5 million users residing in the US and over 500,000 people in the UK. The spreadsheet soon became inaccessible to most employees.