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Australian Court Deals Blow to Kraken’s Operator as US Lawsuit Presses On
- The Federal Court of Australia ruled Friday that Bit Trade, the operator of Kraken Australia, breached the Corporations Act in offering its ‘margin extension’ product to consumers without first making a target market declaration.
- The case against Bit Trade was brought by ASIC in order to remind the crypto industry of its obligations to comply with regulations and protect consumers.
- No penalties have been decided yet, but ASIC says it will pursue financial penalties against Bit Trade at a future date.
The Federal Court of Australia Friday ruled that Bit Trade Pty Ltd., the company that operates Kraken Australia, had breached the Corporations Act by failing to make a ‘target market determination’, as the law requires, prior to making a financial product available to retail investors.
This ruling came as part of a case the Australian Securities and Investments Commission (ASIC) brought against Bit Trade over its ‘margin extension’ product, which was launched in 2021. ASIC has said it will pursue financial penalties against Bit Trade at a date yet to be set.
Related: ASIC Clamps Down on 615 Crypto Scam Websites as Fraudulent Activities Surge to $1.3 Billion
Court Rules Margin Extension Is Effectively a Credit Facility
Section 994b of Australia’s Corporations Act requires that before any financial product is offered to consumers, the party launching the product must first make a ‘target market determination’ for the product.
In his ruling the judge in this case, Justice Nicholls, said that “by issuing the Product (margin extension) to retail clients without having first made a target market determination for the Product, Bit Trade contravened s 994B(1) of the Corporations Act when read with s 994B(2).”
The judge based this ruling on his determination that Bit Trade’s margin extension product was essentially a credit facility when the margin extension created a debt in fiat currency, saying:
A margin extension in a national currency created a deferred debt which meant that the product was a credit facility.
Justice Nicholls’ ruling in ASIC v Bit Trade
Somewhat confusingly, the judge also ruled Bit Trade’s margin extension product didn’t create a deferred debt when digital assets were borrowed instead of fiat currency:
The obligation to repay a digital asset was not an obligation to repay money and was therefore not a deferred debt.
Justice Nicholls’ ruling in ASIC v Bit Trade
ASIC Seeks to Remind Crypto Industry of Importance of Compliance
In a statement released following the ruling, ASIC said that Bit Trade breached the Corporations Act every time Kraken made its margin extension available to a customer: “Since 5 October 2021, Bit Trade’s ‘margin extension’ product has been available to customers trading on the Kraken exchange without a target market determination, as required by law. As a result, Bit Trade contravened s994B(2) of the Corporations Act each time it made the product available to a customer.”
ASIC Deputy Chair, Sarah Court, said the regulator brought this case against Bit Trade to remind the crypto industry in Australia that it needs to comply with relevant legislation and make consumer protections a priority:
We initiated proceedings to send a message to the crypto industry that we will continue to scrutinise products to ensure they comply with regulatory obligations in order to protect consumers.
Sarah Court, ASIC Deputy Chair In a statement emailed to several media outlets, a spokesperson for Kraken Australia said “overall, we’re disappointed by today’s ruling, but we’re prepared and willing to comply with the court’s decision”.
The spokesperson also noted that the ruling highlighted the complexity crypto-based businesses faced in complying with Australian laws, saying that:
The court found that Kraken’s Margin offering is subject to a set of regulations called the Design and Distribution Obligations when we extended fiat currency to clients, but not when we extended cryptocurrency to clients…This is an unsatisfactory position for Australian investors. While we prefer that to be through legislative reform rather than test cases, at least we now have clarity from the Court in respect of our Margin offering, and will move quickly to comply and continue to service our customers.
Kraken Australia emailed statement ASIC Case Comes as Kraken Faces Charges in US
This ruling in Australia comes just as a judge in the US found that the Securities and Exchange Commission (SEC) can proceed with its lawsuit against Kraken US for operating an unregistered exchange.
Kraken had asked for the SEC’s suit to be thrown out, but the judge ruled that:
The SEC has plausibly alleged that at least some of the cryptocurrency transactions that Kraken facilitates on its network constitute investment contracts, and therefore securities, and are accordingly subject to securities laws.
US District Judge William H. Orrick ruling Judge Orrick went on to clarify that he isn’t saying some cryptocurrencies are securities, but rather that some assets sold by Kraken were offered as part of investment contracts.
Related: Kraken Opens Institutional Services in Australia, UK Following US Launch
Kraken’s Chief Legal Officer, Marco Santori, claimed on X / Twitter that the judge’s ruling vindicates Kraken’s long held position that none of the cryptocurrencies it sells are securities, saying:
This is a significant win for Kraken, for the principle of clarity and for crypto users everywhere…It also confirms Kraken’s long-standing position that it does not list securities.
Marco Santori, Kraken’s Chief Legal Officer 
Author
Jody McDonald
Jody is a Brisbane-based freelance writer who specialises in writing about business, technology, and the future of work.
