Kraken: A Complete History of the Pioneering Cryptocurrency Exchange

Founded in 2011 shortly after the infamous Mt. Gox breach, Kraken aimed to create a more secure and robust platform for trading cryptocurrencies. Today, Kraken has cemented itself as one of the largest and most respected crypto exchanges globally, while also expanding into regulated banking. This guide will recap Kraken’s origins, journey to becoming America’s first crypto bank, key innovations, controversies, and overall history as an exchange pioneer.

Overview: From humble beginnings over a decade ago to handling billions in crypto flows today, Kraken has charted an industry-leading path on multiple fronts. Between multi-million dollar acquisitions to strengthen its offering, leading security practices to keep customer funds safe, evolving a trusted brand that competes toe-to-toe with giants like Coinbase, and intelligently working within the U.S. banking system to integrate crypto, Kraken remains one of the most influential forces shaping cryptocurrency’s mainstream trajectory.

Kraken‘s Founding Story

In 2011, founder Jesse Powell visited the offices of Mt. Gox in Japan shortly after Mt. Gox suffered a major security breach that crashed the Bitcoin price. Despite the breach compromising over $450 million of customer funds, Mt. Gox still dominated 70%+ of all Bitcoin trades globally at the time.

Powell realized the massive customer vacuum that would emerge if Mt. Gox were to shut down. He also saw an opportunity to create a more secure, transparent and properly-run exchange to compete with the embattled Mt. Gox. Soon after returning home, Powell began laying the groundwork for the exchange that would become Kraken.

You’re likely wondering – how does an exchange properly secure customers coins while enabling trading? The keys that Kraken quickly improved on compared to Mt.Gox turned out to be private, offline coin storage in spread geographic locations. This prevents mass theft if any single facility is ever compromised. Kraken also implemented strict coin withdrawal verification to thwart hackers. Such practices are now industry standard, but Kraken helped pioneer more robust exchange security very early on.

Kraken conducted extensive testing over 2011-2013 before officially launching its platform publicly in September 2013. The initial version supported Bitcoin, Litecoin and Euro trading pairs right out the gate to cater to European markets. However, Powell‘s instincts around Mt. Gox’s demise proved correct – Mt. Gox folded the following year after catastrophically losing over 850,000 customer Bitcoins, leaving the door open for exchanges like Kraken to cater to suddenly exchange-less traders:

And Kraken was ready – its platform was battle-tested after two years of internal usage, security practices were sound, and demand was surging almost overnight as past Mt. Gox customers desperately needed a new exchange. New account signups in the months following Mt.Gox‘s demise eclipsed even Kraken‘s own projections. Within months, Kraken had grown from a startup to a major exchange player almost overnight – though this sudden surge brought its own challenges as we’ll see.

Growing Into a Market Leader (2014 – 2017)

In subsequent years, Kraken focused heavily on expanding its capabilities through acquisitions, attracting investors, and adding key features to better compete with exchanges like Coinbase gaining ground in North America:

• May 2014: Kraken raises $5 million in a Series A funding round from Hummingbird Ventures and billionaire Trace Mayer‘s Bitcoin Opportunity Fund. This enabled faster hiring, customer support ramp-up and platform improvements. An exchange is only as good as its underlying technology and talent pool, and Kraken used this injection of funds intelligently.

• November 2014: Kraken makes history becoming one of the first crypto exchanges listed on the Bloomberg Terminal, giving it credibility and exposure to Wall Street institutions. When Bloomberg lists an asset or company on the industry “ticker”, it signals to banks, hedge funds and asset managers to take notice.

• January 2015: Kraken launches a "dark pool", allowing large Bitcoin orders to be placed discreetly without revealing the orders and moving Bitcoin prices on other exchanges. Dark pools cater to institutional investors and fund managers, and has helped cement Kraken as the exchange-of-choice for large blockchain whales.

• January 2016: Kraken makes two key acquisitions – Coinsetter and Cavirtex, prominent exchanges in Canada & New York. This instantly expands Kraken‘s reach across North America, bringing millions of dollars of trading volume under its umbrella by absorbing two early competitors.

• April 2016: Kraken closes a Series B funding round raising $8 million from Money Partners Group, one of Japan‘s leading financial groups. This further cements Kraken‘s growing status in Asia, a key region driving crypto adoption.

• 2017 and Beyond: Kraken goes on an acquisition spree, absorbing charting platform Cryptowatch to bolster trading analysis capabilities, and provider Glidera to allow quicker fiat onboarding into crypto trading for US customers. Kraken also adds 50,000 users daily near the 2017 crypto market peak signaling its emergence as a clear global top 5 exchange.

Between strategic acquisitions and being first to offer niche trading vehicles like dark pools in crypto, Kraken rapidly emerged to compete fiercely with the likes of Coinbase and Gemini in America, and market leader Binance globally. The next phase in Kraken‘s ascendency to an exchange powerhouse was to evolve into a bank.

Becoming America‘s First Crypto Bank (2019 – 2020)

Having built a reputable exchange business, Kraken turned its attention to bridging cryptocurrencies with the mainstream banking system – no small feat given the longstanding wariness of banks to engage deeply with crypto.

The largest achievement in Kraken‘s history is becoming America‘s first approved Special Purpose Depository Institution (SPDI) crypto bank – essentially a bank empowered to handle cryptocurrencies. This involved nearly 3 years of preparation:

May 2019 – Kraken registers with the Wyoming Banking Board to apply for an SPDI charter. This grueling application process takes months and is akin to applying for a commercial banking license.

November 2019 – Kraken announces the formation of Kraken Financial – the parent company that would own the to-be crypto bank.

September 2020 – After 12 months of rigorously structuring finances, systems and controls to satisfy banking compliance standards, Kraken Financial becomes the first approved SPDI digital asset bank in Wyoming and by extension – America!

Kraken Financial officially opened its doors for business offering deposit accounts, withdrawal services and client asset custody later in 2020. But how does a crypto exchange bank differ from traditional banks the public uses?

For starters, unlike orthodox banks facing slow-moving regulations, Kraken Bank has greater flexibility around digital assets having been chartered specifically for crypto. Kraken Bank also has authority to provide deposits, savings accounts, custody services and fiduciary powers – just like conventional banks.

But as SPDI-chartered institution with regulators comfortable with its commitment to compliance, Kraken Bank can cater to needs unique to crypto traders without fear of suddenly losing banking powers overnight due to changing political headwinds.

Account-holders also get FDIC protection on cash deposits up to the standard maximum $250,000, improving asset security. And by integrating banking directly with trading accounts, Kraken unifies the user experience.

This banking license represents a Titanic accomplishment cementing Kraken as an innovator willing to work within the system to reshape finance‘s future with private digital assets in the internet age using expertise honed over the past decade running an exchange.

Revenue Sources Powering a $10B+ Valued Company

As one of the leading exchanges within striking distance of market leader Binance consistently ranked top 5 globally by volume, Kraken generates significant revenues from various sources:

Trading Fees – Kraken‘s core income source is charging taker and maker fees based on 30-day trailing volume tiers ranging from 0.26% down to 0% (Bottom tier). Kraken is known for highly competitive pricing, key to attracting active traders.

Staking Rewards – Kraken charges 10-15% as an administrative fee on staking payouts while passing the remaining portion from operating validator nodes on to clients staking assets like ETH and DOT.

Margin Trading Interest – Kraken funds margin trading accounts through its own balance sheet. It brings in revenue by charging daily interest on outstanding marginloan balances.

OTC Desk Fees – High net worth "whales" trading large blocks use Kraken‘s OTC desk. Kraken charges OTC settlement fees as a % on these fiat currency settlements.

Account Management – Kraken‘s private wealth and institutional management arms generate commissions advising high value clients on fund composition and trading strategies tailored to client goals.

Kraken reportedly processed over $90 billion in crypto volumes in 2021 alone. With various income streams benefiting from accelerating adoption across retail and institutions, Kraken could generate over $300 million in 2022 revenues by some estimates.

But growing crypto businesses still have much room for improving security, reliability and compliance – areas Kraken itself has seen challenges periodically.

Challenges Along a Decade-Long Journey

Despite being an early industry leader, Kraken too has faced controversies amidst hypergrowth:

2018 Investigation in New York – Kraken declined participating in the New York Attorney General‘s inquiry into exchange practices around preferential transaction flows. The AG‘s office alleged Kraken was potentially operating outside of compliance in New York. Kraken disagreed and eventually shuttered New York crypto trading operations. Geographic licensing complexities remain a crypto gray area.

System Failure and Shutdowns – A platform upgrade in January 2018 took Kraken offline for nearly 48 hours vs. an expected 2 hours. Clients lost access and were unable to manage positions during volatile price swings. Kraken resumed service but its reputation took a hit for the prolonged disruption. System risks are ever-present.

CFTC Margin Trading Fine – In 2021, Kraken paid $1.25 million over charges around enabling US residents to trade margin products illegally. As one of the earliest exchanges, legacy Kraken systems fell short tracking evolving margin regulations and addressing Americn customer eligibility.

Nevertheless, the fact remains – Kraken matured quickly from a \"startup\" in 2013 into one of the most influential exchanges today architecting the backbone for global crypto flows thanks to calculated gambles like aggressively expanding into North America in 2016 by absorbing competitors.

All longstanding players make mistakes periodically. But by combining security-first DNA with regulatory savvy to secure federal banking powers, Kraken emerged as the most credible American crypto exchange committed for the long haul.

Conclusion: What Does The Future Hold for Crypto Pioneer Kraken?

Given its managed growth balancing innovation with compliance over the past decade to become a regulated bank handling billions in assets, Kraken remains well-positioned as an enduring exchange as adoption advances.

Key takeaways in Kraken‘s history:

• Early security & ethics focus – set solid foundation post Mt.Gox crisis
• Quick maturity acquiring rivals rather than just competing
• Developed niche tools for pros (dark pools, margin)
• Bridged crypto/fiat gap by integrating banking
• $20B+ valuations show investor confidence

If cryptocurrencies form Web 3‘s foundation, it would be unsurprising to see Kraken spearheading mass adoption having formulated prudent strategies beyond just fast user growth and profits. Rather, Kraken built for the long haul – with security, ethics and regulatory collaboration humming smoothly, the future remains bright for one of crypto‘s original exchanges.