TLDR:
Federal Court of Australia ruled against Kraken’s local operator, Bit Trade Pty Ltd
Bit Trade violated Corporations Act by not making a target market determination for its margin extension product
Court found margin extensions in national currency create a deferred debt, making it a credit facility
ASIC views this as a significant outcome against a major global crypto firm
Kraken expressed disappointment but willingness to comply with the court’s decision
On August 23, 2024, the Federal Court of Australia ruled in favor of the Australian Securities and Investments Commission (ASIC) in a case against Bit Trade Pty Ltd, the local operator of cryptocurrency exchange Kraken.
The court found that Bit Trade had contravened Section 994B of the Corporations Act by offering its margin extension product to retail clients without first making a target market determination.
Justice Nicholas determined that Bit Trade’s actions violated the design and distribution obligations (DDO) required by Australian law for financial products.
These obligations mandate that firms design products to meet pre-determined customer needs and distribute them through a targeted plan.
The case centered around Kraken’s margin trading product, which has been available to Australian customers since October 5, 2021.
ASIC argued that this product, which allows users to receive credit up to five times the value of their collateral assets, should be classified as a credit facility.
The court’s ruling partially agreed with ASIC’s position. While Justice Nicholas rejected the notion that repaying a digital asset constituted an obligation to repay money (and thus a deferred debt), he concurred that margin extensions in national currencies, such as Australian or US dollars, do create a deferred debt.
This classification means the product qualifies as a credit facility under Australian regulations.
ASIC Deputy Chair Sarah Court emphasized the significance of this outcome, stating,
“This is a significant outcome for ASIC involving a major global crypto firm.” She added that the regulator initiated proceedings to send a message to the crypto industry about the importance of regulatory compliance to protect consumers.
The court has given both parties seven days to agree on declarations and injunctions. ASIC has indicated its intention to seek financial penalties against Bit Trade.
In response to the ruling, a Kraken spokesperson expressed disappointment but affirmed the company’s willingness to comply with the court’s decision. The spokesperson highlighted the challenges of applying existing regulatory frameworks to innovative technologies like cryptocurrencies.
This case is part of ASIC’s broader efforts to scrutinize the crypto industry and ensure compliance with Australian financial regulations. It follows a similar action against Finder’s crypto wallet Earn, which ASIC lost in March 2024 when the Federal Court dismissed the case.
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