US crypto giant Kraken says $8m court fine ‘hampers’ Australian economic growth

A US crypto giant has called for clearer rules after being slugged by an Australian court with an $8m fine.

A US crypto giant has been fined $8m by Australia’s Federal Court, which agreed with the corporate watchdog that the company had broken the law.

The operator of Kraken crypto exchange, Bit Trade, has 60 days to pay the fine after it was found to have breached design and distribution obligations, as alleged by the Australian Securities & Investments Commission.

A spokeswoman for Kraken said the operator appreciated the court recognised their compliance efforts, but was “disappointed with the outcome of this case”.

“As stated before, we believe this case highlights the urgent need for bespoke crypto legislation to address the shortcomings that are causing confusion and uncertainty for Australian crypto investors and businesses,” she said.

A sign for ‘Bitcoin Street’ outside a cryptocurrency exchange in Barcelona. Picture: Angel Garcia/Bloomberg

“We believe these rulings significantly hamper growth in the Australian economy. We look forward to engaging constructively with policymakers and regulators as these rules are developed.”

ASIC argued that Bit Trade should have been forced to pay $20m, while the crypto company said it should not have to pay more than $4m.

In his reasons, Federal Court judge John Nicholas acknow­ledged that after Bit Trade, which was co-founded in 2013 by Australian Jonathon Miller, was acquired by US company Payward, it tried to comply with Australian law.

“Senior Counsel for Bit Trade … submitted (the compliance) assessment reflected a detailed and careful attempt to understand the regulatory regime as it then stood,” Justice Nicholas said.

“I do not think the evidence provides the necessary foundation for that submission, though ASIC did not submit that the assessment was anything less than a good faith attempt to understand a complex regulatory regime.”

In August, the Federal Court sided with ASIC against Bit Trade, which was found to have broken the law after it failed to comply with design and distribution obligations when offering a margin trading product to Australian customers.

Since October 5, 2021, Bit Trade’s “margin extension” product has been available to customers trading on the Kraken exchange without a target market determination.

The product allowed margin extensions to be made and repaid in either digital assets like Bitcoin or national currencies like US dollars. ASIC’s case alleged that the obligation to repay a digital asset or national currency was a deferred debt and, accordingly, that the product was a credit facility.

A target market determination requires the company to outline who the product should be used by and in what circumstances.

For example, demographics including sex, gender, age and occupation could be considered when assessing if the product matches the needs and financial situation of those customers.

ASIC deputy chair Sarah Court said in response to the initial judgement in August, it was a “significant outcome for ASIC involving a major global crypto firm”.

“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,” she said.

ASIC deputy chair Sarah Court. Picture: John Feder

“Today’s outcome sends a salient reminder to the crypto industry about the importance of compliance with the design and distribution obligations.

“It is a legal requirement for financial products to be distributed to consumers appropriately. Consumers should receive the full protection of the law when dealing in crypto-asset products, and we will continue to take action to ensure this happens.”

News about Kraken’s fine came after the regulator revealed its plans to regulate the crypto sector.

In a consultation paper, ASIC’s plan would lump crypto products into existing financial licensing frameworks.

It is also clear the watchdog expects most crypto companies to apply for a financial services licence, and said they would be given a grace period from court action if they attempted to comply.