The Federal Court on Friday ruled Bit Trade Pty Ltd, the operator of the Kraken crypto exchange in Australia, failed to comply with design and distribution obligations (DDO) when offering a margin trading product to Australian customers.
In a statement on Friday, the Australian Securities and Investments Commission (ASIC) outlined that since 5 October 2021, Bit Trade’s “margin extension” product had been available to customers trading on the Kraken exchange without a target market determination, as required by law.
As a result, Bit Trade contravened s994B(2) of the Corporations Act each time it made the product available to a customer, according to the regulator.
The product provided for margin extensions to be made and repaid in either digital assets (e.g. bitcoin) or national currencies (e.g. US dollars). ASIC’s case alleged that the obligation to repay a digital asset or national currency was a deferred debt and accordingly, that the product was a credit facility.
The regulator first announced it was suing Bit Trade on 21 September 2023, in a move it said should serve as a warning for the crypto industry.
At the time, it alleged that since the DDO regime began, that at least 1,160 Australian customers have used the product, incurring a total loss of approximately $12.95 million.
In handing down his judgment this week, Justice Nicholas found the obligation to repay a digital asset was not an obligation to repay money and was therefore not a deferred debt.
However, Justice Nicholas agreed with ASIC that a margin extension in a national currency created a deferred debt, meaning that the product was a credit facility.
ASIC confirmed that it and Bit Trade have been given seven days to agree on declarations and injunctions, and that it will seek financial penalties against Bit Trade on a date to be set.
“This is a significant outcome for ASIC involving a major global crypto firm,” ASIC deputy chair Sarah Court said.
“We initiated proceedings to send a message to the crypto industry that we will continue to scrutinise products to ensure they comply with regulatory obligations in order to protect consumers,” Court said.
“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.”
Commenting on Friday’s judgment, a Kraken spokesperson said that it served as a reminder that crypto assets are a novel technology.
“We’re pleased the judge understood the nuances in this case and recognised the challenges in applying existing regulatory frameworks to innovative technologies,” they said.
“Overall, we’re disappointed by today’s ruling, but we’re prepared and willing to comply with the court’s decision.”
