Payward, the parent company of cryptocurrency exchange Kraken, secured a $22 million arbitration award against auditor Mazars USA after the firm abandoned a nearly completed audit in 2022. According to a blog post on Tuesday, Payward is asking the Delaware Court of Chancery to enter final judgment on the arbitration award. Mazars withdrew from the audit during Operation Choke Point 2.0, a widely used term covering the Biden administration's unofficial pressure campaign against the crypto industry following the collapse of FTX, causing reputational harm to Kraken despite the auditor confirming in writing it had no disagreement with management, no concerns about integrity, and found no fraud.
Payward Wins $22 Million Arbitration Against Mazars USA
Payward sued Mazars USA for abandoning its audit of Kraken, and an arbitrator awarded the company $22 million. Payward co-CEO Arjun Sethi stated in the blog post that the company spent years and millions in legal fees clearing its reputation after Mazars quit with no findings against the firm. Sethi wrote that when an auditor quits with no findings, the client inherits reputational damage despite doing nothing wrong.
Operation Choke Point 2.0 Targeted Crypto Industry
Operation Choke Point 2.0, a term coined by crypto venture capitalist Nic Carter, references the Biden administration's unofficial pressure campaign against the crypto industry following the collapse of FTX. The term references a similar policy during the Obama administration to pressure banks to cut ties with unsavory businesses like arms dealers. Sethi noted that the policy caused widespread impact across the crypto industry, with smaller companies likely permanently affected.
Banking Regulators Issued Joint Letter in January 2023
Top banking regulators in the U.S., including the Federal Reserve, FDIC, and OCC, issued a joint letter in January 2023 raising soundness concerns for banks about working with crypto firms. Behind the scenes, the FDIC sent at least 25 letters to 24 banks instructing them to pause or refrain from expanding crypto-related activity, according to Sethi's post.
Mazars Cited Legal Uncertainty When Withdrawing
Mazars pointed to uncertainty and risk from legal developments, including the SEC's complaint against Kraken, when withdrawing from the audit. The Securities and Exchange Commission, then headed by Biden appointee Gary Gensler, had begun suing or investigating dozens of crypto firms, including Kraken. When Mazars withdrew, the firm confirmed in writing that it had no disagreement with Payward's management, no concerns about integrity, and had found no fraud. Mazars had been pulling back from the crypto industry beginning in 2022, when it halted all crypto proof-of-reserves work.
SEC Complaint Against Kraken Later Thrown Out
The SEC's complaint against Kraken was later thrown out after Gensler stepped down, along with almost all of the agency's other crypto-related enforcement actions. Sethi noted that Kraken suffered reputational harm from Operation Choke Point 2.0 policies, including Mazars' decision to abandon its audit and the federal agents' raid on founder and former CEO Jesse Powell's home in March 2023. Operation Choke Point 2.0 has largely been wound down, with previous guidance and restrictions rolled back, and the Trump administration beginning to investigate wrongful cases of debanking.
Payward Seeks Delaware Court Final Judgment
Payward is asking the Delaware Court of Chancery to enter final judgment on the $22 million arbitration award. Sethi emphasized that an audit is essential infrastructure for banking relationships, licenses, counterparties, and regulators.
Sethi Calls for Passing the Clarity Act
Sethi used the blog post to call for passing the Clarity Act, which would establish clear regulatory boundaries for the SEC and Commodity Futures Trading Commission over the crypto industry. The Clarity Act is currently being debated among various Senate committees. Sethi wrote that no founder, developer, or customer should ever need to win an arbitration to prove they deserved a bank account, an auditor, and the basic infrastructure of doing business in America.
FAQ
What did Payward win in arbitration against Mazars USA?
Payward won a $22 million arbitration award against Mazars USA after the auditor abandoned a nearly completed audit of Kraken in 2022. Payward is asking the Delaware Court of Chancery to enter final judgment on the award.
Why did Mazars withdraw from Kraken's audit?
Mazars pointed to uncertainty and risk from legal developments, including the SEC's complaint against Kraken, when withdrawing from the audit during Operation Choke Point 2.0. The firm confirmed in writing it had no disagreement with management, no concerns about integrity, and found no fraud.
What is the Clarity Act that Payward supports?
The Clarity Act would establish clear regulatory boundaries for the SEC and Commodity Futures Trading Commission over the crypto industry. The legislation is currently being debated among various Senate committees.
