Australian court fines Kraken $8 million for unauthorized margin lending product

The Federal Court of Australia has fined Bit Trade, the operator of the country’s Kraken cryptocurrency exchange, $8 million for offering an unapproved margin lending product to local customers.

The penalty follows allegations by the Australian Securities and Investments Commission (ASIC) that the company breached financial regulations by failing to assess customer suitability for the product.

Legal implications

The credit facility, which allowed users to leverage borrowed funds as investments backed by digital assets such as Bitcoin or national currencies as collateral, was issued without a target market determination (TMD).

A TMD ensures that financial offers are appropriately targeted to consumers based on their needs and circumstances. ASIC argued that Bit Trade offered the product to more than 1,100 Australian customers without this document.

Between October 2021 and August 2023, 1,163 customers paid more than $12 million in fees and interest for the product, with the total number of users likely higher since it remained available until August 2024.

Judge John Nicholas, who handed down the penalty decision, highlighted the seriousness of Bit Trade’s breach of rules, saying they were “serious and motivated by a desire to maximize revenue”. He criticized the company for not addressing compliance issues until the regulator raised concerns, calling its system “severely deficient”.

The financial watchdog reported that people lost a combined $7.85 million due to the product, with one investor losing almost $6.3 million. In addition to the fine, Bit Trade was ordered to cover ASIC’s legal costs.

Regulatory implications and industry reactions

ASIC chairman Joe Longo described the ruling as a landmark decision that shows the importance of TMDs in protecting consumers from harmful financial offers.

Longo stated: “This significant result is a reminder for digital asset companies to be mindful of their regulatory compliance obligations.” He added that many virtual currency products are subject to existing laws and must be designed and marketed responsibly to safeguard Australian investors.

Meanwhile, a Kraken spokesperson expressed disappointment with the court’s decision, calling for custom cryptocurrency legislation to address the regulatory uncertainty facing the industry.

The company previously criticized existing rules after the court ruled against Bit Trade in September, claiming the ruling revealed inefficiencies in the country’s crypto regulations. Kraken expressed support for the updates to the current laws, but expressed concern about delays in implementing those changes.

The Australian regulator recently started consultations with the crypto industry to refine its approach. The agency is seeking input on updates to its digital asset guidance, including clarification of when such assets fall under the current rules.

Meanwhile, opposition Treasury and Financial Services spokesman Luke Howarth accused the government of leaving the sector in “regulatory limbo”. He argued that ASIC’s actions risked pre-empting comprehensive legislative reforms, which could slow the growth of the Australian crypto market.

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