ASIC Sues Crypto Exchange Over Design and Distribution Failures, Here is What Aussie Customers Need to Know

Yesterday, the Australian Securities and Investments Commission (ASIC) filed civil court action against the popular Californian crypto trading platform Kraken. Kraken’s provider, Bit Trade Pty Ltd, will undergo legal proceedings in the Federal Court.

ASIC’s allegations are targeted toward Kraken’s margin trading product – a form of leveraged trading that allows investors to borrow money and amplify potential losses (or gains). Customers can borrow up to five times the value of the crypto assets they deposit as collateral, which the Australian financial watchdog claims is a “credit facility.”

ASIC has accused Kraken of not fulfilling all the legal obligations of offering such a product. In particular, Kraken reportedly failed to complete a “target market determination” before allowing its customers to use the platform’s margin trading service. ASIC introduced these demographic assessment laws in 2021, but Kraken has allegedly maintained they are exempt from such regulations.

“We believe this product is offered in compliance with Australian law and will continue our efforts to receive clarity on this matter“

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Jonathon Miller, Kraken Managing DIrector for Australia

Margin trading: Boom or bust

Trading with leverage is inherently quite risky and only intended for experienced investors. For example, a trader could lock up $1,000 AUD as collateral and use it to place an order for $5,000 worth of BTC. However, suppose this trade proves unsuccessful and the customer loses too much money. In that case, the exchange can issue a “margin call” and demand they repay the loan. This may involve the customer selling off other holdings in their account or depositing additional funds. ASIC contends that Kraken’s Australian customer base has lost $12.95 million since the product was unveiled.

What does this mean for Australians?

ASIC opening a legal can of worms against a crypto exchange may seem intimidating for crypto investors. Many community members are on high alert after the US Securities and Exchange Commission’s (SEC) year of court cases. In reality, Australian crypto exchanges have always had a complex relationship with leveraged trading. Given its riskiness, the government has long hosted strict requirements for brokers offering margin trading. 

Due to this, there are very few trading platforms that provide margin trading on AUD crypto pairs – rather, most investors must use crypto or foreign currency on unregulated exchanges like ByBit.

It’s unlikely the outcome of this court case will result in Kraken having to cease operations in Australia, although a loss will almost certainly mean shutting down the platform’s margin trading arm. However, the news suggests Australia’s financial custodians are keenly watching local crypto products. 

As ASIC deputy chair Sarah Court 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.”