ASIC v Bit Trade Pty Ltd – Crypto related products may be financial products

In Brief - A broader message on the application of the DDO regime to products that are not regulated under Parts 6D.2 and 7.9 Corporations Act such as credit contracts and short term credit facilities.

ASIC has commenced civil penalty proceedings in the Federal Court against Bit Trade Pty Ltd (Bit Trade) which is a provider of the Kraken crypto exchange to Australian customers.

The commencement of proceedings reflects ASIC’s continuing surveillance and regulation of crypto exchanges and crypto-related products, specifically Bit Trade’s alleged failure to make a target market determination (TMD) for a credit product related to crypto trading before offering it to Australian customers as required under the design and distribution provisions (DDO Regime).

However, in addition, the circumstances have a general relevance for financial product and credit providers, notably that the scope of ‘financial product’ definition under the design and distribution obligations which applies the ASIC Act definition is different to the definition of ‘financial product’ in the Corporations Act. In the context of the Bit Trade proceedings, ASIC alleges that the DDO Regime applies to its credit arrangement with customers.
 

ASIC allegations against Bit Trade

Bit Trade provides services to Australian customers, including a digital asset exchange known as the Kraken Exchange on which its customers:

• can purchase and sell certain digital assets, including crypto-assets and fiat currencies

• can receive Bit Trade ‘margin extension’ (Credit Product) which is an extension of credit of up to five times the value of the assets they use as collateral in the form of digital assets or legal tender for use in the purchase and sale of digital assets when executing a spot transaction on the Kraken Exchange

• are charged an opening fee and a rollover fee for the extension of the margin. 

ASIC alleges that the Credit Product which facilitates margin trading is a credit facility as it offers customers credit for use in the sale and purchase of certain crypto assets on the Kraken exchange. 
Customers can receive an extension of credit of up to five times the value of the assets they use as collateral. In the current circumstances, the Credit Product involved extending credit to purchase crypto-assets to over 1160 clients, of which ASIC alleges 968 have suffered losses.

Regulatory breach - failure to comply with design and distribution obligations

The underlying regulatory breach alleged by ASIC is that Bit Trade failed to comply with the design and distribution obligations for the margin trading product it offers Australian customers on the Kraken exchange, that is:

• the Credit Product is a ‘financial product’ for the purposes of the DDO Regime in Part 7.8A of the Corporations Act (which picks up the definition of ‘financial product’ under the ASIC Act)

• the Credit Product was offered to retail clients

• the Credit Product was offered without issuing a 'target market determination' as required by the Corporations Act subsections 994B(1) and (2).

As noted above in the circumstances:

• Part 7.8 A of the Corporations Act applies the definition of financial product under the ASIC Act to the DDO Regime and in turn, section 12BAA(7)(k) of the ASIC Act applies the definition of ‘credit facility’ in ASIC Regulation 2B

• the financial product definition in the ASIC Act picks up credit contracts and short term credit facilities which are not regulated as financial products under the Corporations Act, except for the DDO provisions.

Observations

The Bit Trade proceedings highlight the following:

• ASIC continues to signal that "entities providing crypto-related products should be aware that such products may be financial products"

• for the purposes of the DDO Regime, the definition of a financial product under the ASIC Act will apply and this definition is different from the equivalent definition in the Corporations Act

• the DDO Regime covers products that are not regulated under Parts 6D.2 and 7.9 of the Corporations Act but are otherwise within the scope of the ASIC Act

• in the context of the legal proceedings against Bit Trade, ASIC alleges the Credit Product is a credit facility within the definition of credit facility under ASIC Regulation 2B 

• issuers and providers of financial products and credit products should separately consider the scope of the definition of ‘financial product’ under the ASIC Act to assess whether, even if products are not regulated under Parts 6D.2 and 7.9 of the Corporations Act, they are captured under the ASIC Act and thus must comply with the DDO Regime by issuing a TMD.