The Federal Court of Australia today ruled Bit Trade Pty Ltd, the operator of the Kraken crypto exchange in Australia, failed to comply with design and distribution obligations when offering a margin trading product to Australian customers.

Since 5 October 2021, Bit Trade’s “margin extension” product has been available to customers trading on the Kraken exchange without a target market determination, as required by law. As a result, Bit Trade contravened s994B(2) of the Corporations Act each time it made the product available to a customer.

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). 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.

In handing down his judgment Justice Nicholas found the obligation to repay a digital asset was not an obligation to repay money and was therefore not a deferred debt.

However, his Honour agreed with ASIC that a margin extension in a national currency created a deferred debt which meant that the product was a credit facility.

ASIC and Bit Trade have been given seven days to agree on declarations and injunctions. ASIC will seek financial penalties against Bit Trade on a date to be set.

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.