ASIC has launched legal action against the Kraken crypto exchange alleging more than 1,100 customers lost $13 million on a product that didn’t meet regulatory rules

- September 21, 2023 2 MIN READ
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Financial regulator the Australian Securities and Investment Commission (ASIC) has launched Federal Court against Bit Trade Pty Ltd, the company behind the Kraken crypto exchange in Australian, alleging it failed to comply with regulations designed to protect consumers.

ASIC’s case alleges Bit Trade’s failure to make a “target market determination” for its margin trading product, a legal requirement for financial products, before offering it to Australian customers.

Kraken margin trading product has been available in Australia since January 2020.

As part of the regulatory requirements for financial products, 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 target market determination is an important requirement under DDO. It’s a public document that sets out the class of consumers a financial product is likely to be appropriate for (target market).

Those same rules led ASIC to begin similar court action against Finder for alleged ‘unlicensed conduct’ over its crypto product Earn in December last year. Finder shut down Earn just weeks before the legal action was announced.

ASIC now alleges that since the DDO process for the Kraken margin trading product began in October 2021, at least 1,160 Australians used it and incurred a total loss of approximately $12.95 million.

ASIC alleges the margin trading product is a credit facility as it offers customers credit to buy crypto assets on the Kraken exchange. Bit Trade calls it a ‘margin extension’. Users can receive an extension of credit of up to five times the value of the assets they use as collateral.

The regulator alleges Bit Trade failed to comply with the DDO and having notified the company of its concerns in June 2022, it’s still be offered to Australian customers without a target market determination and now wants the Federal Court to fine and prohibit the ongoing use of the product without a target market determination.

ASIC Deputy Chair Sarah Court said the legal action is part of the regulator’s ongoing focus on crypto industry compliance.

‘These proceedings should send a message to the crypto industry that products will continue to be scrutinised by ASIC to ensure they comply with regulatory obligations in order to protect consumers.

‘ASIC’s action should be a reminder of the importance to comply with the design and distribution obligations so that financial products are distributed to consumers appropriately.’

The date for the first case management hearing is yet to be scheduled by the Court.

Kraken’s managing director for Australia, Jonathon Miller, said the crypto exchange “takes compliance seriously” and was surprised by the court action. believing their margin trading product complies with the law.

“We have been attempting to constructively engage with ASIC on this matter for some time to ensure our product offering, as an AUSTRAC registered Digital Currency Exchange, remains compliant,” he said.

“We are therefore both surprised and disappointed to have received today’s enforcement action. We believe this product is offered in compliance with Australian law, and will continue our efforts to receive clarity on this matter.”