Kraken Fined $8 Million by ASIC for Australian Rule Violations

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As a seasoned researcher with a keen interest in digital assets and financial regulations, I find the recent fine imposed on Bit Trade (Kraken) by the ASIC to be a significant development that highlights both the potential risks and opportunities within the crypto sphere.

In a successful legal action, the Australian Securities and Investment Commission (ASIC) fined Bit Trade Pty Ltd, the Australian branch of the Kraken digital currency exchange, a sum totaling 8 million dollars.

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

Payward Inc.’s subsidiary, known as Bit Trade, manages the Australian branch of Kraken’s exchange. This subsidiary is registered with AUSTRAC and operates under their supervision. As a result of certain regulatory infractions, Bit Trade has been fined $8 million. Moreover, they are also responsible for covering the legal fees incurred by ASIC during this process.

The Australian Securities and Investments Commission (ASIC) has initiated legal actions against the Australian operator of Kraken crypto exchange, resulting in an order for them to pay $8 million due to illegally providing credit facilities to over 1,100 Australian clients.

As per the latest report, Bit Trade has been providing a Margin Extension service since October 2021. This service enables clients to obtain loans that can be repaid using either cryptocurrencies like Bitcoin (BTC) or traditional currencies such as the U.S. dollar.

Instead of creating a Target Market Determination (TMD), unfortunately, the company overlooked this requirement. The TMD serves as a compulsory document that pinpoints the suitable demographic for financial goods in accordance with Australia’s Design and Distribution Obligations (DDO).

In August 2024, it was decided by the Federal Court that Bit Trade’s margin extension product was equivalent to a loan under Australian law. Since there was no Terms of Market Document (TMD) provided, the company was found to have violated its regulatory duties with each sale of the product. The importance of this ruling was highlighted by ASIC Chair Joe Longo.

Determining the target market is crucial for preventing investors from receiving marketing of unsuitable products that may potentially cause them harm,” as Longo explained.

Longo emphasized that a total of around 1,100 customers had fees and interest payments surpassing $7 million, while their collective trading losses were over $5 million. Shockingly, a single investor suffered nearly $4 million in losses. Longo again stressed the far-reaching effects of this decision.

Additionally, Justice Nicholas criticized Bit Trade’s compliance procedures during sentencing, labeling them as “severely lacking.” The court emphasized that Bit Trade’s actions were driven by revenue generation, a conclusion reached because the company continued to provide the product despite recognizing possible legal infractions.

He noted that Bit Trade only began considering the rules of the DDO regime once they were pointed out by ASIC for the first time.

Under the Design and Distribution Obligation (DDO) system, it’s required that companies create financial products suited for particular customer segments and distribute these offerings in a responsible manner.

Currently, the situation arises as the Australian Securities and Investments Commission (ASIC) intensifies its focus on the digital asset market. Notably, they have started discussions with relevant parties in the industry. Their aim is to revise their guidelines concerning when a digital asset offering could be classified as a financial product subject to regulation.

Feedback on these consultations is accepted through February 2025. At present, actions taken by ASIC serve as a reminder of the potential dangers involved when investing in digital currencies.

Apart from addressing any legal issues, Kraken is also considering closing its NFT marketplace. By doing so, the centralized exchange can direct its resources towards future projects. Recently, they reduced their workforce by about 15% as a part of their reorganization process in October.

In spite of encountering operational challenges, the intention is to introduce the Layer-2 blockchain ‘Ink’ in the year 2025. There’s a continued hope for an Initial Public Offering (IPO), as potential changes in U.S. regulations are anticipated next year might make it feasible.

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2024-12-12 12:01