Kraken Exchange Fined $5.1M AUD for Unauthorized Margin Trading in Australia

TLDR

• Kraken fined $5.1 million AUD by Australian court for offering margin lending without proper regulatory approval
• Over 1,100 Australian customers were affected, with users charged over US$7 million in fees and interest
• One investor lost almost US$4 million through the platform’s margin extension product
• The product was offered without a required target market determination (TMD) since October 2021
• This marks ASIC’s first penalty against a digital asset exchange for TMD violations

Australian financial regulators have imposed a $5.1 million AUD fine on cryptocurrency exchange Kraken for operating an unauthorized margin lending service that affected more than 1,100 Australian customers.

The penalty comes after the Australian Federal Court found that Bit Trade, which operates Kraken in Australia, had violated financial regulations by offering its “margin extension” product without obtaining proper regulatory approval since October 2021.

The Australian Securities and Investments Commission (ASIC) brought the legal action against the exchange after discovering that Kraken had failed to secure a target market determination (TMD) for its margin lending product. This product allowed users to trade with borrowed funds using either cryptocurrencies like Bitcoin or traditional currencies such as U.S. dollars as collateral.

Court documents reveal that Australian customers were charged more than US$7 million in fees and interest through the unauthorized service. In one notable case, a single investor suffered losses approaching US$4 million.

The Federal Court’s ruling highlighted that Bit Trade continued offering the margin trading service even after being informed of its regulatory obligations. Justice Nicholas, who presided over the case, pointed to this behavior as evidence of “a seriously deficient compliance system.”

According to ASIC Chair Joe Longo, the exchange prioritized revenue generation over regulatory compliance. The court determined that Kraken’s violations were deliberate and driven by profit motives rather than oversight or technical errors.

The penalty marks a watershed moment in Australian cryptocurrency regulation, as it represents ASIC’s first enforcement action against a digital asset exchange specifically for TMD violations. These requirements are designed to ensure that financial products are marketed only to suitable investors.

Beyond the monetary penalty, the court has ordered Bit Trade to cover ASIC’s legal costs related to the proceedings. This additional financial burden adds to the company’s regulatory consequences.

The margin extension product allowed traders to amplify their potential returns by borrowing funds to increase their trading positions. However, this type of trading also magnifies potential losses, which became reality for many Australian customers of the platform.

ASIC’s investigation revealed that Kraken had not properly assessed whether the margin trading product was appropriate for its Australian customer base. This lack of evaluation violated the design and distribution obligations (DDO) that apply to financial product providers in Australia.

The regulatory breach occurred each time Kraken offered the margin product without the required TMD, resulting in multiple violations over the period from October 2021 until the practice was halted.

Joe Longo emphasized that target market determinations play a crucial role in protecting investors from unsuitable financial products. The ASIC Chair stated that these requirements help prevent the marketing of potentially harmful products to inappropriate audiences.

The court’s decision serves as a warning to other cryptocurrency exchanges operating in Australia. ASIC has made it clear that digital asset platforms must meet the same regulatory standards as traditional financial services providers.

Kraken’s Australian operation, through Bit Trade, allowed customers to trade with leverage using both cryptocurrency and fiat currency. The service charged interest and fees on these margin extensions, generating revenue for the exchange while exposing customers to enhanced trading risks.

The Federal Court’s ruling requires Kraken to pay the $5.1 million AUD fine plus legal costs, making this one of the largest penalties imposed on a cryptocurrency exchange in Australia to date.