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At the heart of the case was the question of whether Kraken’s margin trading product qualified as a credit facility under Australian law.
Kraken, one of the world’s top cryptocurrency exchanges, has suffered a major legal defeat in Australia after its local operator, Bit Trade Pty Ltd, was found guilty of breaching regulatory requirements.
On Friday, August 23, the Australian Securities and Investments Commission (ASIC) announced that the country’s federal court ruled in its favor, bringing an end to a year-long legal battle over Kraken’s failure to comply with local laws governing the sale of financial products.
A Legal Victory for ASIC
Justice Nicholas delivered the ruling, determining that Bit Trade Pty Ltd violated Australia’s design and distribution obligations (DDO) when offering margin trading products to consumers.
The court found that the company failed to issue a mandatory “target market determination” (TMD), which is required by Australian law to ensure financial products are marketed only to appropriate customer segments. This safeguard was established to protect consumers from unsuitable or high-risk financial offerings.
The legal dispute began in September 2023 when ASIC launched proceedings against Bit Trade, accusing Kraken’s Australian operator of non-compliance with the DDO while offering margin trading products.
These products allow traders to borrow funds to leverage their positions, increasing both potential gains and risks. Under Australian law, such high-risk products must have a clear TMD to ensure they are targeted at appropriate customers.
In its lawsuit, ASIC argued that Bit Trade began offering these margin extensions to Australian customers in October 2021 without first issuing a TMD. As a result, the financial regulator accused Kraken of violating section 994B(2) of the Corporations Act each time the product was made available to a customer.
Deferred Debt and Credit Facility Classification
At the heart of the case was the question of whether Kraken’s margin trading product qualified as a credit facility under Australian law. The product allowed users to borrow funds, which could then be repaid either in digital assets, such as Bitcoin (BTC), or in national currencies, like the US dollar.
ASIC contended that the obligation to repay the borrowed funds in either digital assets or national currencies created a “deferred debt,” classifying the product as a credit facility subject to stricter regulations.
During the court hearing, Justice Nicholas ruled that repaying debt in BTC does not count as repaying “money” under the law and thus does not constitute a deferred debt. However, when repayment is made in national currencies, it does create a deferred debt, making the product a credit facility in those instances. This ruling ultimately secured ASIC’s victory in the case.
A Significant Outcome
ASIC Deputy Chair Sarah Court views the outcome of the case as a significant win for the regulator against a global crypto firm. She further stated that the ruling is a clear warning that ASIC will not spare any defaulters.
“This is a significant outcome for ASIC involving a major global crypto firm. We initiated proceedings to send a clear message to the crypto industry that we will continue to scrutinize products to ensure they comply with regulatory obligations in order to protect consumers,” she said.
The market watchdog announced that it will seek financial penalties against Bit Trade, with a hearing to determine the appropriate punishment for the company at a future date.
Disclaimer: Coinspeaker is committed to providing unbiased and transparent reporting. This article aims to deliver accurate and timely information but should not be taken as financial or investment advice. Since market conditions can change rapidly, we encourage you to verify information on your own and consult with a professional before making any decisions based on this content.
Chimamanda is a crypto enthusiast and experienced writer focusing on the dynamic world of cryptocurrencies. She joined the industry in 2019 and has since developed an interest in the emerging economy. She combines her passion for blockchain technology with her love for travel and food, bringing a fresh and engaging perspective to her work.
