The Federal Court of Australia recently determined that Bit Trade Pty Ltd (an Australian subsidiary within the global Kraken group) contravened s 994B of the Corporations Act 2001 (Cth) by failing to make a target market determination prior to issuing a margin extension financial product. The design and distribution obligations in Division 2 of Part 7.8A of the Corporations Act (also known as the “DDO regime”) require that a target market determination is made by an issuer for a financial product prior to it being issued to a retail client.
Bit Trade’s “margin extension” product allowed Australian customers to borrow digital assets (cryptocurrency) or legal tender in order to make spot purchases of digital assets on the Kraken exchange. The margin extension facility was provided by Bit Trade to its customers as an adjunct offering to its digital exchange platform.
The Court found that the margin extension product was a financial product within the extended definition of “financial product” under Division 2 of Part 2 of the ASIC Act and so the DDO regime applied to it.
Bit Trade’s terms and conditions enabled a person to return cryptocurrency in satisfaction of their obligation to repay Bit Trade the cryptocurrency borrowed. The Court found that this arrangement did not amount to a monetary obligation capable of constituting a debt because it would not require the payment of a sum of money. However, that did not matter in the result because the product also permitted the extension of legal tender (in both Australian and foreign currency) and so was capable of giving rise to a monetary obligation and therefore a deferred debt obligation.
By issuing the product without first issuing a target market determination in respect of the product, Bit Trade contravened s 994B DDO regime.
The Court will hear the parties on penalty later this year. The judgment is available here.
Karen Petch acted for ASIC, led by Jeremy Giles SC. James Arnott SC and Amy Campbell acted for Bit Trade, instructed by Gilbert + Tobin.
