Kraken, an American crypto exchange, is suspected of violating sanctions

Kraken, one of the world’s largest cryptocurrency exchanges, is under federal investigation on suspicion of violating U.S. sanctions by allowing users in Iran and elsewhere to buy and sell digital tokens, according to five people associated with the company or with knowledge of the inquiry.

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 will be the largest US crypto firm to face an enforcement action from OFAC sanctions against Iran, which the US imposed in 1979, banning the export of goods or services to persons or entities in the country.

The federal government has increasingly cracked down on crypto 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 misrepresenting its reserves last year, while the Justice Department brought insider trading charges this month against a former employee of Coinbase, the largest US crypto exchange.

Scrutiny of the industry has increased in recent months as the crypto market went into meltdown 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 $1.25 million penalty against the company for a prohibited trading service.

In an internal conversation about employee benefits in 2019, Jesse Powell, Kraken’s CEO, suggested he would consider breaking the law in a wide variety of situations if the benefits to the company outweigh the potential penalties, according to messages seen by The New York Times. The company has also dealt with internal conflicts over issues such as race and gender, which were encouraged 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 as a general matter reports to regulators itself potential problems.”

A spokeswoman for the Treasury Department said the agency “does not confirm or comment on potential or ongoing investigations” and is committed to enforcing “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 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 authorities to control.

In October, the Treasury Department warned that cryptocurrencies “potentially reduce the effectiveness of US sanctions.” It released a 30-page handbook recommending cryptocurrency 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 are responsible for certain types of financial regulatory compliance,” said Hailey Lennon, an attorney at Anderson Kill who handles regulatory issues in crypto.

Kraken and the issue of sanctions surfaced in a November 2019 lawsuit by a former Treasury Department employee, Nathan Peter Runyon, who accused the startup of generating revenue from accounts in sanctioned countries. He said he brought the matter to Kraken’s chief financial officer and chief compliance officer in early 2019, according to legal documents. (The case 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’s clients have also opened accounts in Syria and Cuba, two other countries under U.S. sanctions, the people said.

In 2020, OFAC fined BitGo, a digital wallet service headquartered in Palo Alto, California, more than $98,000 in 2020 for 183 apparent sanctions violations. Last year, it fined BitPay, an Atlanta-based crypto payment processor, more than $500,000 for 2,102 apparent violations. Coinbase also disclosed 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 marketed as free from any government influence or regulation.

In 2018, the New York State Attorney General asked Kraken and 12 other exchanges to respond to a questionnaire about their operations. Kraken declined to answer, and Mr Powell went on to call New York “hostile to business”. Twitter.

In 2019, Mr. Powell argued on Slack about parental leave at Kraken, according to messages seen by The Times. Mr. Powell said parental leave was a burden on the company because a child “might as well be a new job, a distracting hobby or a harmful addiction” and “is something outside of work that has a negative impact on 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 complying with the legal requirement.” He added, “Disobeying the law would by default be ‘advisable’, but it must always be considered an option.”

Mr. Powell did not respond to an email seeking comment.

This year, Mr. Powell was one of them highest voices in the crypto industry resisted calls to close accounts in Russia after it invaded Ukraine. The United States has sanctioned certain individuals and companies in Russia, but it has not required crypto companies to cut off access to the country entirely.

As of last month, Kraken appeared to still be servicing accounts in sanctioned countries such as Iran, according to a spreadsheet Mr. Powell posted to a company-wide Slack channel to show where the company’s customers were located. He said the data came from residential information listed on “verified accounts.”

The spreadsheet said Kraken had 1,522 users with homes 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 with homes in the US and more than 500,000 in the UK. The spreadsheet was soon made unavailable to most employees.