A margin trading product offered by cryptocurrency exchange Kraken failed to meet its legal obligations under Australia’s Corporations Act, a Federal Court judge has ruled.
The judgment hands a rare win to corporate regulator the Australian Securities and Investment Commission (ASIC) amid an ongoing focus on regulatory compliance in the crypto sector.
Justice John Nicholas ruled that the Kraken exchange’s Australian operator, Bit Trade Pty Ltd, failed to comply with the Act’s design and distribution obligations (DDO) when offering its “margin extension” product to Australian customers. The law requires companies to produce a target market determination when offering financial services products. It’s a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) thus determining who it can be pitched at.
ASIC launched legal action nearly 12 months ago, alleging that since Kraken’s margin trading product began in October 2021, and claiming that at least 1,160 Australians used it and incurred a total loss of approximately $12.95 million.
The regulator argued it was 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. It was repaid in either digital assets (eg. Bitcoin) or national currencies (eg. USD)
ASIC’s case argued that the obligation to repay made it a deferred debt and thus credit. The corporate cop notified the company of its concerns in June 2022, and Kraken still be offered it without a target market determination.
Justice Nicholas rejected ASIC’s argument in some respects, saying repaying a digital asset was not an obligation to repay money and was therefore not a deferred debt, but he agreed with ASIC that a margin extension in a national currency created a deferred debt and thus a credit facility.
“An obligation to pay an amount of cryptocurrency of some type is not an obligation to pay a sum of money and therefore cannot be a debt,” his Honour wrote in the judgment.
“The provision of a Margin Extension in national currency (including in Australian or US dollars) gives rise to a “deferred debt” which is incurred by the customer when they are provided with the Margin Extension and which becomes payable upon the customer ceasing to be eligible to receive the Margin Extension. It follows that the Product is a credit facility.”
ASIC and Bit Trade now have seven days to agree on declarations and injunctions, and the regulator will seek financial penalties too.
ASIC Deputy Chair Sarah Court said the judgment was significant against a major global crypto firm.
“We initiated proceedings to send a message to the crypto industry that we will continue to scrutinise products to ensure they comply with regulatory obligations in order to protect consumers,” she said.
‘Today’s outcome sends a salient reminder to the crypto industry about the importance of compliance with the design and distribution obligations. 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.’
A spokesperson for Kraken, which defended the case, said they were “disappointed” but “willing to comply with the court’s decision”
“Today’s ruling is another reminder of how cryptoassets are a novel technology,” they said.
“We’re pleased the judge understood the nuances in this case, and recognised the challenges in applying existing regulatory frameworks to innovative technologies.
ASIC launched similar court action against Finder over its crypto wallet Earn, but lost in March this year, when the Federal Court dismissed the case.
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