Kraken ordered to pay $1.25M in fines over illegal margined digital currency products

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U.S. digital currency exchange Kraken has settled with the U.S. Commodity Futures Trading Commission (CFTC) in connection with its charges of offering unqualified investors with illegal margined digital currency products. The exchange paid $1.25 million to the watchdog and will cease offering the products.

From June 2020 to July 2021, Kraken offered margined retail commodity transactions in digital assets to U.S. clients, the CFTC alleged. It acted as the sole margin provider and maintained physical and constructive custody of all assets purchased using margin for the duration of the open margined position, it adds.

Kraken required its margin users to exit these positions and repay the assets within 28 days. The clients had to fulfill their margin obligations before the exchange allowed them to transfer their assets. If unable to do so within 28 days, Kraken liquidated the position. It could also force liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin.

Kraken, whose CEO ‘admitted’ to bank fraud on Twitter, offered margin ratios of up to 5:1, according to the regulator, noting that the product the exchange offered was illegal as it didn’t have the necessary licenses.

“Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken illegally operated as an unregistered FCM.”

An FCM (futures commission merchant) is an entity licensed to buy or sell futures contracts options on futures, and retail off-exchange forex contracts or swaps.

In paying the fine, the exchange waived a hearing and a judicial review by any court. It also pledged to prevent any such illegal margin products on its platform.

A spokesperson for Kraken claimed, “We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally—one that allows the crypto space in the U.S. to flourish, while protecting the interests of individuals and the integrity of the industry.”

CFTC commissioner decries unclear regulations

The decision by the CFTC that Kraken had breached its Commodity Exchange Act was informed by its Final Interpretive Guidance on retail commodity transactions involving digital assets, according to Commissioner Dawn Stump.

In an accompanying statement, Stump pointed out that the Guidance took effect in June 2020. And while at the time it was a big step for the agency, the commissioner believes that it’s about time the CFTC “undertakes a rulemaking proceeding to supersede the Guidance by adopting binding and enforceable rules that will provide certainty to the marketplace and a shared understanding of the ‘rules of the road.’”

Even if a digital currency exchange registers as an FCM, it remains unclear what regulations it should abide by, she went on. In addition, such an exchange could still be found in breach of other regulations for exchanges. To be fully compliant, the exchange would also have to attain a designated contract market (DCM) license.

“It also would be unprecedented for an entity to register as both a DCM and an FCM,” she wrote.

The $1.25 million fine, while still a significant step for the watchdog, is a mere slap in the wrist for an entity the size of Kraken. The exchange, which launched in 2011, is said to be valued at more than $10 billion. Other companies in the space have paid much larger fines, including a $571 million penalty imposed by the CFTC on Control-Finance LTD and the more recent $100 million penalty on BitMEX exchange.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple and
Ethereum—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.