On Friday 23 August 2024, Nicholas J gave judgment in ASIC’s case against Bit Trade Pty Ltd (Bit Trade), which is part of the group trading as Kraken and provides access to the Kraken digital asset exchange and other services, including the “Margin Extension” product to which the enforcement action relates.
On Friday 23 August 2024, Nicholas J gave judgment in ASIC’s case against Bit Trade Pty Ltd (Bit Trade), which is part of the group trading as Kraken and provides access to the Kraken digital asset exchange and other services, including the “Margin Extension” product to which the enforcement action relates.
Background
In contrast to other recent enforcement actions, the dispute was not about whether Bit Trade was issuing a derivative or interest in a managed investment scheme, but rather whether the Margin Extension product fell within the scope of the design and distribution regime, which would require Bit Trade to issue a Target Market Determination for the product.
The regime extends to the issue of certain products to retail clients that are not financial products under the Corporations Act 2001 (Cth), but are regulated under the Australian Securities and Investments Commission Act 2001 (Cth), which includes a credit facility. Credit is broadly defined and includes any form of financial accommodation, and it was common ground that the Margin Extension product was such. Financial accommodation that is not a debt is subject to an exemption from the regime, and Bit Trade argued that its Margin Extension product fell within the exemption. The case’s outcome turned on this point.
Relevantly, the Margin Extension product facilitated Bit Trade advancing either fiat currency or digital assets to a customer to make spot trades through their Kraken account. From 6 December 2022, there was no term limit, so Bit Trade’s customers could maintain an open position on margin for an unlimited duration if they continued to meet the eligibility criteria. Importantly, to terminate a margin extension (including when the customer was in default), the advance was required to be repaid in the same form (i.e advances of USD must be repaid in USD, bitcoin must be returned to close out an advance in bitcoin etc).
Decision
Ultimately, it was the flexibility to receive an advance in either fiat currency or digital assets, coupled with the requirement to pay it back in the same form, that brought Bit Trade undone. A debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation (which may be conditional but unavoidable).
As cryptocurrency is not considered money, an obligation to provide, or that can be settled in, cryptocurrency does not constitute a debt. A failure to comply with such an obligation may sound in damages in a claim for breach of contract. As the Margin Extension product terms enabled customers to accept financial accommodation in fiat currency, and, in such circumstances, required repayment in the same currency, the product involved a deferred debt and did not fall within the relevant exemption. This is the case even if the relevant customers did not receive an advance of fiat currency because it was sufficient that the product terms allowed for such advances. The product was therefore held to be a credit facility to which the regime applies. Accordingly, Bit Trade was found to have contravened the requirements of the regime by failing to issue a Target Market Determination.
Final thoughts
Although ASIC prevailed, some may consider it a hollow victory. ASIC succeeded because advances of fiat currency could be made under Bit Trade’s Margin Extension product and were required to be repaid in the same fiat currency. Had the advances been limited to digital assets or been repayable with digital assets, the outcome would likely have been different. The case highlights the different regulatory outcomes applicable to fiat currency and digital asset focused products and the imperative for relevant legislation that would provide consumers and industry with regulatory certainty following Treasury’s consultation process late last year.
The decision confirms that one aspect of a product’s terms could bring it within Australia’s design and distribution regime despite that term not being a central feature of the product. It serves as a reminder to issuers to carefully consider their product’s terms, including whether the benefit of offering a feature that may bring the product within the scope of the regime outweighs the burden of its additional regulatory obligations.
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