The Australian Securities and Investments Commission (ASIC) has taken legal action against Bit Trade, the provider of Kraken’s crypto exchange services in Australia. This lawsuit centers on allegations of non-compliance with design and distribution obligations related to one of its trading products.
A September 21st oficial statement from the regulator says that the case revolves around Bit Trade’s failure to make a target market determination before offering its margin trading product to Australian customers.
We are suing Bit Trade, provider of the Kraken crypto exchange in Australia, for allegedly failing to comply with the design and distribution obligations (DDO) for its margin trading product. Since October 2021, customers have lost about $12.95 million https://t.co/MCRYqah0dP pic.twitter.com/zURQ2xDw7M
— ASIC Media (@asicmedia) September 20, 2023
In simple terms, design and distribution obligations are legal requirements for companies offering financial products in Australia. These obligations demand that companies design financial products that meet the specific needs of customers and then distribute them through a carefully planned approach.
Kraken-Linked Margin Trading Product as a Credit Facility
According to ASIC, Bit Trade’s margin trading product essentially functions as a credit facility. It provides customers with credit to engage in the buying and selling of certain crypto assets on the Kraken exchange. Bit Trade refers to this as ‘margin extension,’ allowing customers to access credit up to five times the value of the assets they use as collateral.
ASIC Deputy Chair Sarah Court emphasized the significance of this legal action. She stated,
“These proceedings should send a message to the crypto industry that products will continue to be scrutinized by ASIC to ensure they comply with regulatory obligations in order to protect consumers.”
However, Bit Trade has been offering its margin trading product to Australian customers through Kraken since January 2020. ASIC’s allegations stem from the introduction of design and distribution obligations in October 2021.
During this period, at least “1,160 Australian customers” allegedly used Bit Trade’s margin trading product, of which 968 made a loss, the total being approximately $12.95 million.
The Australian Securities and Investments Commission raised concerns with Bit Trade regarding non-compliance with these obligations in June 2022. Despite these concerns, Bit Trade continued to offer the product without adhering to the required target market determination.
As a result, ASIC is pursuing several actions in response to these allegations. They are seeking declarations, pecuniary penalties, and injunctions to prohibit the ongoing alleged contravening conduct by Bit Trade. However, as of now, the date for the first case management hearing is yet to be scheduled by the Court.
Kraken has faced multiple lawsuits over the years. In February 2023, the US SEC sued the exchange for not registering their crypto-asset staking-as-a-service program, resulting in a $30 million penalty. Additionally, in September 2021, the CFTC ordered Kraken to settle charges for illegal margined retail commodity transactions and failure to register as a futures commission merchant.