Key Takeaways
- Bit Trade was found in violation of design and distribution obligations for its margin trading product.
- ASIC emphasizes the importance of regulatory compliance for consumer protection in the crypto industry.
- SEC sues Kraken for operating as an unregistered securities exchange, highlighting the ongoing regulatory challenges faced by crypto exchanges in the U.S.
In a major setback, a Federal Court has found Kraken’s Australian arm guilty of breaching financial laws, explicitly failing to meet design and distribution obligations while offering margin trading products to local customers.
ASIC Cracks Down on Bit Trade for Non-Compliance
In October 2021, Bit Trade launched its “margin extension” product on the Kraken platform without meeting a critical legal requirement: establishing a target market determination.
This oversight led to repeated violations of Section 994B(2) of the Corporations Act , as the product was made available to customers without proper safeguards.
The Australian Securities and Investments Commission (ASIC) took swift action, initiating civil proceedings against Bit Trade in September 2023.
The regulator alleged that the company failed to comply with design and distribution obligations despite being notified of concerns.
ASIC Deputy Chair Sarah Court hailed the outcome as a major victory, stating that the ruling against the global crypto firm sends a strong message to the industry.
She commented:
“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.”
Crypto Margin Product Ruled a Credit Facility
The product in question allowed for margin extensions to be made and repaid using digital assets like Bitcoin or fiat currencies like U.S. dollars.
ASIC argued that the obligation to repay in either digital asset or fiat currency constituted a deferred debt, thereby classifying the product as a credit facility.
In his judgment, Justice Nicholas determined that the obligation to repay a digital asset does not constitute an obligation to repay the money, and therefore, it does not qualify as a deferred debt.
However, he concurred with ASIC in that a margin extension repaid in a national currency does create a deferred debt, which means that the product functions as a credit facility.
Following the judgment, ASIC and Bit Trade were given seven days to reach an agreement on the declarations and injunctions.
ASIC plans to pursue financial penalties against Bit Trade, with the hearing for these penalties to be scheduled at a later date.
SEC Sues Kraken for Operating as Unregistered Securities Exchange
Beyond Australia, Kraken is also in ongoing legal tussles with the U.S. Securities and Exchange Commission (SEC).
In November 2023, the SEC filed a lawsuit against Kraken, accusing the platform of operating as a securities exchange without the requisite registration with the regulatory authority.
The SEC charged Payward, the owner of Kraken, with operating the platform as an unregistered securities exchange. Similar to its actions against Binance, the commission also included more incendiary allegations to emphasize its point.
The primary charge of operating an illegal securities exchange marked the latest chapter in the SEC’s ongoing crackdown. Based on the regulator’s stance that most cryptocurrencies are securities, it argued that all crypto exchanges serving U.S. customers are violating the law.
The SEC’s central complaint underscored its continued commitment to its interpretation of U.S. securities law, which has led to the designation of nearly all major altcoins as securities.
Critics have noted that although the SEC claims jurisdiction over most cryptocurrencies, it has not provided a viable pathway for exchanges to register their operations with the agency. Kraken CEO David Ripley contended that the SEC’s accusations of non-compliance are undermined by the agency’s failure to offer crypto exchanges a practical alternative.
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