The Australian Securities and Investments Commission (ASIC) has successfully prosecuted Bit Trade Pty Ltd, the operator of the Kraken cryptocurrency exchange in Australia, and imposed an $8 million fine.
The fine stems from Bit Trade's failure to meet the necessary regulatory obligations for over 1,100 Australian customers and its illegal issuance of margin extension products.
Kraken Fined for Investor Harm
Bit Trade is a subsidiary of Payward Incorporated and is registered with AUSTRAC to operate Kraken's Australian exchange. In addition to the $8 million fine, the company will also bear ASIC's legal costs.
"ASIC's legal proceedings have resulted in the operator of the Kraken cryptocurrency exchange in Australia being ordered to pay $8 million for illegally issuing credit facilities to over 1,100 Australian customers." – ASIC share.
According to the official press release, Bit Trade began offering margin extension products in October 2021. These products allowed customers to borrow funds that could be repaid in digital assets like BTC or national currencies like the US dollar.
However, the company failed to prepare a Target Market Determination (TMD). The TMD is a mandatory document under Australia's Design and Distribution Obligations (DDO) that identifies the appropriate target market for a financial product.
In August 2024, the Federal Court ruled that Bit Trade's margin extension products constituted credit facilities under Australian law. The lack of a TMD meant the company was in breach of regulatory responsibilities every time it offered the product. ASIC Chair Joe Longo emphasized the significance of this ruling.
"Target Market Determinations are essential to ensure investors are not inappropriately marketed products that could cause them harm." – Longo.
He highlighted that over 1,100 customers paid more than $7 million in fees and interest, with cumulative trading losses exceeding $5 million. Remarkably, one investor lost nearly $4 million. Longo reiterated the broader implications of this decision.
Additionally, Judge Nicholas criticized Bit Trade's compliance practices while imposing the fine, describing the company's compliance system as "seriously deficient." The court noted that Bit Trade's actions were motivated by profit, concluding that the company decided to continue offering the product even after becoming aware of potential legal violations.
"Bit Trade did not consider the requirements of the DDO regime until ASIC first drew its attention to it." – Judge Nicholas.
The Design and Distribution Obligations (DDO) framework requires firms to design and responsibly distribute financial products tailored to the needs of specific consumer groups.
Meanwhile, this case comes at a time when ASIC is intensifying its oversight of the digital assets sector. The regulator has recently initiated consultations with industry stakeholders to update guidance on when digital asset offerings may be classified as regulated financial products.
These consultations will gather feedback until February 2025. However, ASIC's enforcement action currently highlights the risks associated with digital asset investments.
Beyond the legal issues, Kraken also plans to shut down its NFT marketplace. This move will allow the centralized exchange to allocate resources to upcoming projects. In October, it laid off up to 15% of its staff.
Despite these operational challenges, the exchange plans to launch the layer-2 blockchain 'Ink' in 2025. The possibility of an IPO (initial public offering) also remains in the cards, amid expected regulatory changes in the US next year.
