ASIC has commenced civil penalty proceedings in the Federal Court against Bit Trade Pty Ltd, provider of the Kraken crypto exchange to Australian customers.

ASIC alleges that Bit Trade failed to comply with the design and distribution obligations for the margin trading product it offers Australian customers on the Kraken exchange.

ASIC’s case focuses on Bit Trade’s failure to make a target market determination for the product before offering it to Australian customers, as required by law. 

ASIC alleges that Bit Trade’s margin trading product is a credit facility as it offers customers credit for use in the sale and purchase of certain crypto assets on the Kraken exchange. Bit Trade describes this as ‘margin extension’. Customers can receive an extension of credit of up to five times the value of the assets they use as collateral.

ASIC Deputy Chair Sarah Court said, ‘These proceedings should send a message to the crypto industry that products will continue to be scrutinised by ASIC to ensure they comply with regulatory obligations in order to protect consumers.

‘ASIC’s action should be a reminder of the importance to comply with the design and distribution obligations so that financial products are distributed to consumers appropriately.’

Bit Trade has offered its margin trading product to Australian customers via the Kraken exchange since January 2020. ASIC alleges that since the commencement of the design and distribution obligations on 5 October 2021, at least 1160 Australian customers have used the margin trading product incurring a total loss of approximately $12.95 million.

ASIC notified Bit Trade of its concerns regarding the failure to comply with the design and distribution obligations in June 2022. Bit Trade continues to offer the product to Australian customers without a target market determination.

ASIC is seeking declarations, pecuniary penalty and injunctions prohibiting the ongoing alleged contravening conduct.

The date for the first case management hearing is yet to be scheduled by the Court.

Background

Bit Trade is registered with AUSTRAC. It is a subsidiary of Payward Incorporated.

Entities providing crypto-related products should be aware that such products may be financial products. ASIC Information Sheet 225: Crypto Assets provides guidance on the circumstances in which a crypto-related offering may be a financial product.

The design and distribution obligations (DDO) require firms to design financial products that meet the needs of consumers, and to distribute those products in a targeted manner. A target market determination is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (target market) and matters relevant to the product’s distribution and review.

ASIC’s Moneysmart website has information for consumers about the risks of investing in crypto-assets.

Editor's note 1:

On 12 October 2023, a Committal Mention Hearing was completed. The matter has been listed for case management on 16 February 2024. An amended Concise Statement has been filed with the Court. 

Editor's note 2:

The case management hearing occurred on 16 February 2024 before Justice Nicholas. Timetabling orders for the management of the proceeding were made and a one day hearing on liability has been listed for 1 July 2024.

Editor's note 3:

On 1 July 2024, a hearing on liability took place before Justice Nicholas who has reserved judgment.