CFTC penalizes Kraken exchange for offering margined products illegally

By: Jinia Shawdagor
Jinia Shawdagor
Jinia is a cryptocurrency and blockchain enthusiast based in Sweden. She loves everything positive, travelling, and extracting joy and… read more.
on Sep 29, 2021
  • The regulator has ordered Kraken’s parent company to pay a $1.25 million fine for the offenses.
  • Per CFTC’s Vincent McGonagle, this move is part of the regulator’s efforts to protect customers.
  • Kraken claims that it started limiting margin trading to eligible clients before this settlement.

The Commodity Futures Trading Commission (CFTC) has directed Payward Ventures, Inc., the company that owns renowned cryptocurrency exchange Kraken to pay $1.25 million (£0.93 million) in fines. The entity disclosed this news through a press release on September 28, noting that this civil monetary penalty comes after Kraken offered margined retail commodity transactions in digital currencies illegally. Reportedly, Kraken also failed to register with the CFTC as a futures commission merchant (FCM).

According to the news release, Kraken offered ineligible US citizens margined retail commodity transactions on cryptos like Bitcoin (BTC/USD) between July 2020 and June 2021. The CFTC further noted that Kraken acted as the sole margin provider. The exchange also retained custody of all assets purchased using margin for the duration that customers opened margined positions.

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The regulator added that Kraken supplied cryptos or fiats to pay sellers whenever they bought an asset using margin. Kraken then required the customers to exit open positions and repay the assets it had offered to trade within 28 days. This requirement prevented users from transferring assets out of the exchange until they settled the repayment.

Failure to repay the assets within 28 days put Kraken in a position to force the liquidation of the margin position. The exchange also had the power to force liquidation if the value of the collateral fell below a specific threshold percentage of the total outstanding margin. As a result, the exchange failed to deliver the purchased assets in most cases due to these rules.

Focusing on investor protection

According to the CFTC, Kraken went against the law by executing these transactions. The first infraction is that the exchange did not complete the transactions on a dedicated contract market as the law mandates. On top of this, the exchange acted like an unregistered FCM by soliciting and accepting money or property to margin such transactions.

In light of these mistakes, the CFTC imposed the fine on Kraken and instructed the exchange to avoid engaging in activities that flout the Commodity Exchange Act (CEA).

CFTC’s Acting Director of Enforcement, Vincent McGonagle, said

This action is part of the CFTC’s broader effort to protect US customers. Margined, leveraged or financed digital asset trading offered to retail US customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations.

To avoid further action, Kraken said it engaged with the CFTC about its proposed margin trading guidance to seek more clarity on what the guidelines deem acceptable. In response, the exchange began limiting its margin products to eligible clients in the US even before reaching this settlement with the regulator.

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