Kraken Exchange Hits Major Roadblock in Australia

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Kraken, one of the leading cryptocurrency exchanges, has encountered a significant legal challenge in Australia. Just recently, an Australian Federal Court ruled in a lawsuit brought by the Australian Securities and Investments Commission (ASIC). The lawsuit centered around Kraken’s offering its Magic Extension Product to Australian retail investors, particularly focusing on providing margin trading services.

Kraken Takes Steps to Align Its Operation

The court’s decision was centered on the determination that Kraken’s practice of extending margin in fiat currency to its clients fell under the Design and Distribution Obligations (DDO) of the Corporations Act. These obligations require financial service providers to ensure that their products are appropriately designed and distributed to the right market segments. The court ruled that Kraken’s fiat margin extensions were subject to these obligations.

Furthermore, the court made a key distinction regarding Kraken’s margin trading offerings in cryptocurrency. It determined that when Kraken extended the margin to clients in cryptocurrency, this activity did not fall under the same DDO regulations. In response to the court’s ruling, Kraken Exchange has taken immediate steps to align its operations with the legal requirements. The exchange has moved to restrict margin trading in fiat currency for Australian clients. Also, it limited such services only to wholesale investors or clients who meet specific criteria.

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Despite the new restrictions on fiat margin trading, Kraken’s margin extensions in cryptocurrency trading remain unaffected. Australian clients can continue to trade crypto assets on margin without the additional regulatory burden imposed on fiat transactions.

Australian Court Rules Against Kraken’s Bit Trade

Last month, the Australian Federal Court ruled against Bit Trade, the operator of Kraken’s crypto exchange in Australia, siding with the ASIC. The court determined that Bit Trade failed to comply with key financial regulations, including design and distribution obligations, and operated as an unlicensed credit facility.

The legal battle began in September 2023 when ASIC filed a civil suit against Bit Trade. The lawsuit alleged the company’s margin trading product was launched without meeting the target market determinations. ASIC also argued that Bit Trade’s margin trading product functioned as a credit facility because it allowed customers to receive an extension of credit up to five times the value of their collateral.

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Following the ruling, ASIC and Bit Trade were given a week to finalize declarations and injunctions. Meanwhile, ASIC indicated that it will seek financial penalties against Bit Trade due to this case.

Kraken’s Global Expansion

Despite this setback, Kraken continues to expand its services globally. In July, Kraken Institutional announced the expansion of its Kraken Custody services to institutional clients in the UK and Australia. The exchange aims to meet the growing demand from hedge funds and exchange-traded funds issuers for secure digital asset management solutions.

Earlier in June, the exchange was reportedly planning to raise at least $100 million in a pre-IPO round, with the aim of going public as soon as next year.