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  • Writer's pictureS Pettigrove and M Bacina

Kraken hunted by Australian Regulator

Updated: Sep 21, 2023

The Australian Securities and Investments Commission (ASIC) announced today that it has commenced legal proceedings against the Australian arm of global crypto exchange, Kraken.

In a press release, ASIC asserted that a margin trading product offered by Kraken (through a registered digital asset exchange entity, Bit Trade Pty Ltd) was a 'credit facility' and that publication of a Target Market Determination (TMD) for retail users was required. A TMD is part of Design and Distribution Obligations (DDO) which require businesses offering retail financial products to assess the needs of users, and to distribute those products in a targeted manner.

ASIC has sought an injunction to prevent the product from being offered. No court date has yet been set.

Kraken's product

According to ASIC's Court filing, the margin trading product is a credit facility as it provides customers credit to buy and sell certain crypto assets on the Kraken exchange. Kraken calls the product Margin Extension.

To obtain a margin extension, a customer must have a minimum balance of certain crypto assets in their account to be used as collateral. Customers can receive an extension of margin of up to 5 times the value of their collateral. Kraken charges an opening and rollover fee for the extension of margin.

If a customer's collateral level falls below a required minimum, Kraken may sell the customer's crypto assets and apply the proceeds to repay the margin extension such that the customer's collateral reaches the minimum requirement.

DDO obligations

ASIC claims Kraken's Margin Extension product satisfies the expanded financial product definition in the Australian Securities and Investment Commission Act 2001 (Cth), to which DDO apply when the product is issued to retail clients.

Accordingly, it says that Kraken was required to issue a TMD on and from 5 October 2021 which corresponds with start of ASIC's DDO powers. The Managing Director of Kraken Australia, Mr Jonathon Miller said to the Australian Financial Review:

We have been attempting to constructively engage with ASIC on this matter for some time to ensure our product offering, as an AUSTRAC registered Digital Currency Exchange, remains compliant...[w]e are both surprised and disappointed to have received today’s enforcement action. We believe this product is offered in compliance with Australian law, and will continue our efforts to receive clarity on this matter.

This is a similar theme which emerged from other ASIC crypto-related prosecutions, which appears counter to the policy objective of managing risk in crypto-assets. ASIC is seeking declarations, pecuniary penalties and an injunction prohibiting Bit Trade from continuing to distribute the product.

This latest enforcement action by ASIC follows a series of regulatory enforcement actions in relation to crypto-asset related offerings. ASIC's has identified both DDO and crypto-assets as top enforcement priorities in its corporate plan, with a particular focus on products which ASIC says mimic traditional financial products. The latest action suggests that ASIC will test the limits of its DDO powers in relation to crypto-based products. ASIC has been making increasing use of its DDO powers as an enforcement tool, especially in relation to funds and derivative products.

Unfortunately there is presently no guidance published by ASIC setting out how a TMD would be prepared or published for any crypto-product, or a margin product similar to the Margin Extension product.

By Michael Bacina, Tim Masters and Jake Huang


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