Kraken, an exchange with its headquarters in San Francisco is being fined for issuing credit facilities in Australia without permission.
Australia's financial watchdog, the Australian Securities & Investments Commission, has fined Kraken's local operator $5.1 million for illegally offering margin trading to retail customers. The penalty has been levied against Bit Trade, which runs Kraken's operations in the country.
The regulator said that over 1,100 retail customers accessed high-risk margin trading products on the platform, and they weren't properly screened.
Collectively, this led to losses of more than $5 Million. In a ruling filed to the Federal Court of Australia on Thursday, the details of these investments were detailed.
"[…] Bit Trade is not required to prepare a TMD for the Product because the DDO regime does not apply to credit facilities used for investment purposes (i.e., credit facilities used to buy or sell crypto assets)," the judgment's opinion reads. TK
Financial firms are required to document their target market (TMD) in order to identify who they serve. It is also used as a tool for defining a firm’s distribution strategy. This opinion refers to the DDO (design-and-distribution obligations), a framework that forces companies to follow TMDs and develop them when they offer retail financial products.
The case with Kraken marks the ASIC's first penalty made under the design and distribution rules which have been in effect since October 2021.
Together, these requirements form Australia's consumer protection system that ensures financial products reach appropriate customers rather than being marketed indiscriminately to everyone.
The Federal Court said it found damning evidence of negligence on Bit Trade's part. Justice Nicholas characterized Bit Trade's compliance system as "seriously deficient." ASIC was able to intervene after ASIC ignored the regulatory requirements.
These violations are motivated by profits, according to the Judge.
"Target market determinations are fundamental in ensuring that investors are not inappropriately marketed products that could harm them," ASIC Chairman Joe Longo was quoted in a press release from the regulator.
Kraken’s timing is particularly bad. The exchange launched a licensed broker service last month for Australian wholesale investors. When the exchange announced this, they positioned it as part of a new service for wholesale investors in Australia. "ongoing commitment to regulatory compliance," It continues to expand across the nation.
ASIC’s portrayal of the reality is quite different. According to customer data, 225 retail customers lost an average of more than $1,000. Investors lost up to $4 million. ASIC said the company offered margin products knowing of the risks.
The ASIC's investigation also reveals some deeper issues at hand.
Bit Trade, for example, lacked the proper systems necessary to determine whether a customer was suitable. According to the agency, they let retail investors use borrowed money to trade crypto, creating dangerous leverage situations in a market that is already volatile.
Bit Trade must also pay ASIC's legal costs from the proceedings. They've since restricted margin trading to wholesale clients only.
For many investors in the retail sector, however, damage has already been done.
The fine marks a critical moment for crypto regulation in Australia, as it shows how regulators won't tolerate exchanges that prioritize growth over customer protection. It is likely that other platforms will take note.
This action signals an increasing regulatory scrutiny on crypto exchanges. ASIC has been consulting the digital asset industry to gather feedback for proposed updates in crypto regulations through 2025.
Stacy Elliott is the editor.