Crypto exchange Kraken cops $8m fine for unlawful credit with ‘margin extension' that cost more than 1000 customers millions in losses

The company running the Kraken crypto exchange in Australia has been handed an $8 million penalty by the Federal Court for unlawfully issuing a credit facility to more than 1100 customers.

The fine follows legal action by the corporate regulator ASIC against Bit Trade Pty Ltd, launched in September last year, over its ‘margin extension’ product.

It gave Kraken customers credit to buy and sell cryptocurrencies and repay in either digital assets or fiat currencies such as US dollars. The margin extension gave them credit worth up to five times the value of the collateral asset.

ASIC argued successfully that Bit Trade’s failed to make a Target Market Determination (TMD) for the product, a legal requirement.

Companies are required by law to meet what’s known as design and distribution obligations (DDO) to ensure the products meets the needs of consumers, then distribute them in a targeted manner. A TMD is required under DDO. It’s a public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market).

In August the Federal Court ruled that the margin extension was a credit facility and required a TMD because it offered margin extensions in national currencies. That meant the company breached its DDO.

It was in place from October 2021, and the 1,160 customers who used it paid fees and interest charges costing more than A$10 million. On top of that, they lost more than $7.8 million on the deals, with one investor losing almost $6.2 million.

ASIC Chair Joe Longo said TMDs ensure investors are not inappropriately marketed products that could harm them.

‘This is a significant outcome. It is ASIC’s first penalty against an entity for failing to have a TMD and a reminder for digital assets firms to consider their regulatory compliance obligations,” he said.

“ASIC believes many products offered by digital assets firms are captured by the current law, which means those products need to be properly designed and marketed to the right consumers to ensure Australians receive appropriate protections.”

Justice John Nicholas said in handing down the $8m penalty that Bit Trade “did not turn its mind to the requirement of the DDO regime until these were first drawn to its attention by ASIC” adding that it that it “points to a seriously deficient compliance system”.

The fact that Kraken continued to offer its margin extension after ASIC flagged its concerns about it being in potential breach of the law led His Honour to conclude that “Bit Trade’s contraventions were serious and motivated by a desire to maximise revenue”.

Bit Trade was also ordered to pay ASIC’s costs for the proceedings.