ASIC sues Australian crypto exchange Kraken as traders lose $13 million

An Australian crypto exchange has been sued by the financial regulator as its customers cop $13 million in losses.

The Australian Securities & Investments Commission (ASIC) announced on Thursday it had commenced civil penalty proceedings in the federal court against Bit Trade, the company that provides the US based Kraken crypto exchange to Australian customers.

ASIC, which oversees financial services and consumer credit in Australia, alleged Bit Trade failed to comply with the design and distribution obligations for one of its trading products.

ASIC alleges Bit Trade, a subsidiary of Kraken’s owner Payward Incorporated, failed to make a target market determination before offering its margin trading product to Australian customers.

Design and distribution obligations are a legal requirement for firms that offer financial products. The obligations set out specific requirements for firms to design financial products that meet predetermined needs of customers and then distribute them through a targeted plan.

ASIC claimed that, since the introduction of the design and distribution obligations in October 2021, at least 1160 Australian customers had used Bit Trade’s margin trading product and incurred a total loss of about $12.95 million.

A bitter legal battle

ASIC deputy chair Sarah Court said the proceeding should be taken as a warning to the crypto industry as the regulator tries to crack down on what’s considered the wild west of financial services.

“These proceedings should send a message to the crypto industry that products will continue to be scrutinised by ASIC to ensure they comply with regulatory obligations in order to protect consumers,” she said in ASIC’s announcement.

“ASIC’s action should be a reminder of the importance to comply with the design and distribution obligations so that financial products are distributed to consumers appropriately.”

ASIC said it had notified Bit Trade of its failure to comply with the obligations in June 2022, but alleges the company continued to offer the product without ever making the relevant determinations.

But Jonathon Miller, managing director of Kraken’s Australian operations, said he was “surprised and disappointed” by ASIC’s lawsuits, as he believed the product was compliant.

“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,” Mr Miller told website Cointelegraph.

“We are therefore 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.”

What is Bit Trade’s margin trading product?

Through Kraken, Bit Trade offers a margin trading product, which it describes as a “margin extension” service that allows customers to receive an extension of credit up to five times the value of the assets they use as collateral.

As explained on Kraken’s website: “Spot margin trading lets you buy and sell crypto on Kraken using funds that could exceed the balance of your account.”

ASIC, however, claims this product is a “credit facility” since it offers customers “credit for use in the sale and purchase of certain crypto assets on the Kraken exchange”.

Kraken describes itself as a place where Aussies can “buy crypto with peace of mind”. It claims to be “passionately focused on advancing the cryptocurrency industry for all Australians”.

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