A Federal Court in Australia has ruled that Bit Trade Pty Ltd failed to comply with design and distribution obligations when offering a margin trading product to Australian customers.
Bit Trade Pty Ltd, registered with AUSTRAC and a subsidiary of Payward Incorporated, is the operator of the Kraken crypto exchange in Australia.
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.
Since 5 October 2021, the firm’s “margin extension” product has been available to customers trading on the Kraken exchange without a target market determination, as required by law.
Margin extension in a national currency creates a deferred debt
The product provided for margin extensions to be made and repaid in either digital assets (e.g. Bitcoin) or national currencies (e.g. US dollars).
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The Australian Securities and Investments Commission filed a complaint alleging that the obligation to repay a digital asset or national currency was a deferred debt and accordingly, that the product was a credit facility.
Justice Nicholas partially disagreed with that view. The obligation to repay a digital asset was not an obligation to repay money and was therefore not a deferred debt, the judge found. However, Justice Nicholas agreed with ASIC that a margin extension in a national currency created a deferred debt which meant that the product was a credit facility.
As a result, Bit Trade contravened s994B(2) of the Corporations Act each time it made the product available to a customer.
“Consumers should receive the full protection of the law when dealing in crypto”
ASIC Deputy Chair Sarah Court said: “This is 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 scrutinize products to ensure they comply with regulatory obligations in order to protect consumers.
“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”, Sarah Court added.
