The Australian Securities and Investments Commission (ASIC) has successfully prosecuted Bit Trade Pty Ltd, the operator of the Kraken cryptocurrency exchange in Australia, resulting in an $8 million fine.
The penalty stems from Bit Trade’s unlawful issuance of a margin extension product to over 1,100 Australian customers without meeting the required regulatory obligations.
Kraken Fined for Investor Harm
Bit Trade, a subsidiary of Payward Incorporated, is registered with AUSTRAC and operates Kraken’s Australian exchange. In addition to the $8 million fine, the company will also cover ASIC’s legal costs.
“Legal proceedings launched by ASIC have seen the Australian operator of the Kraken crypto exchange ordered to pay $8 million for unlawfully issuing a credit facility to more than 1,100 Australian customers,” ASIC shared.
According to an official media release, Bit Trade offered a margin extension product since October 2021. Reportedly, the product allowed customers to borrow funds, repayable in either digital assets like Bitcoin (BTC) or national currencies such as US dollars.
However, the company failed to prepare a target market determination (TMD). A TMD is a mandatory document that identifies the appropriate audience for financial products under Australia’s design and distribution obligations (DDO).
In August 2024, the Federal Court determined that Bit Trade’s margin extension product constituted a credit facility under Australian law. The absence of a TMD meant the company breached its regulatory responsibilities with every offering of the product. ASIC Chair Joe Longo emphasized the significance of the ruling.
“Target market determinations are fundamental in ensuring that investors are not inappropriately marketed products that could harm them,” Longo stated.
He highlighted that over 1,100 customers paid fees and interest exceeding $7 million, with cumulative trading losses of more than $5 million. Alarmingly, one investor alone lost nearly $4 million. Longo reiterated the broader implications of the decision.
Further, Justice Nicholas, in delivering the penalty, criticized Bit Trade’s compliance practices, describing the company’s compliance system as “seriously deficient.” The court noted that Bit Trade’s actions drew motivation from revenue generation, a conclusion stemming from the firm’s move to continue offering the product even after becoming aware of potential legal violations.
“Bit Trade did not turn its mind to the requirement of the DDO regime until these were first drawn to its attention by ASIC,” he observed.
The Design and Distribution Obligation (DDO) framework mandates that firms design financial products tailored to the needs of specific consumer groups and distribute them responsibly.
Meanwhile, the case comes at a time when ASIC is increasing its scrutiny of the digital asset sector. The regulator has recently commenced consultations with industry stakeholders. It looks to update its guidance on when digital asset offerings may qualify as regulated financial products.
These consultations are open for feedback until February 2025. For now, however, ASIC’s enforcement actions highlight the risks associated with investing in digital assets.
Beyond legal challenges, Kraken is also planning to shut down its NFT marketplace. This move will enable the centralized exchange to allocate resources to upcoming projects. In October, it retrenched up to 15% of its staff as part of its restructuring efforts.
Despite these operational woes, the exchange plans to launch Its Layer-2 blockchain ‘Ink’ In 2025. Possibilities of an IPO (Initial Public Offering) also remain alive amid expected regulatory shifts in the US next year.