Kraken Violated Australian Law by Offering Margin Products: Court Rules

An Australian federal court today (Friday) ruled that Bit Trade Pty Ltd, which operates the Kraken crypto exchange in the country, violated the design and distribution obligations (DDO) while offering margin trading products to local customers.

A Partial Victory for ASIC

The ruling came after the Australian Securities and Investment Commission (ASIC) sued the company last September for offering credit facilities with its margin products. However, the court found violations in only one of the two allegations the regulator brought against the company.

Kraken offered customers credit for using it to sell and purchase cryptocurrencies, which it calls “margin extension”, made and repaid in either digital assets or fiat. Its customers can use this extension to receive credit up to five times the value of the collateral asset.

According to the regulator, the margin products can be classified as deferred debt, and thus, the products were credit facilities. It alleged that the company violated the local laws each time it made the product available to a customer.

Although the court agreed that a margin extension in a national currency created a deferred debt, making it a credit facility, it found that the repayment in digital currencies is not an obligation to repay the money and was, therefore, not a deferred debt.

“This is a significant outcome for ASIC involving a major global crypto firm,” said ASIC’s Deputy Chair, Sarah Court. “We initiated proceedings to send a message to the crypto industry that we will continue to scrutinize products to ensure they comply with regulatory obligations in order to protect consumers.”

“Consumers Should Receive Full Protection”

Bit Trade, a subsidiary of Payward, has been offering margin trading products since January 2020. The regulator highlighted that since the commencement of its design and distribution obligation, at least 1,160 Australian customers of Kraken used the margin trading product, losing about AU$12.95 million.

According to the court order, ASIC and Bit Trade must agree on declarations and injunctions within seven days. Although the regulator is seeking a civil penalty, it has yet to reveal any figure to the public.

“Today’s outcome sends a salient reminder to the crypto industry about the importance of compliance with the design and distribution obligations,” ASIC’s Deputy Chair added. “It is a legal requirement for financial products to be distributed to consumers appropriately. Consumers should receive the full protection of the law when dealing in crypto-asset products, and we will continue to take action to ensure this happens.”