Federal Court rules against Bit Trade for DDO breach
Nearly a year after ASIC commenced proceedings, the Federal Court has ruled that Bit Trade Pty Ltd (BT), the provider of the Kraken crypto exchange in Australia, failed to meet its design and distribution obligations (DDO) when offering a margin trading product to Australian consumers.
Background
ASIC’s allegations against BT included that the margin trading product (Credit Product) was a ‘financial product’ for the purposes of the DDO in Part 7.8A of the Corporations Act 2001 (Cth), was offered to retail clients, and it was offered without issuing a ‘target market determination’(TMD) as required by the Corporations Act under subsections 994B(1) and (2).
The relevant product provided for margin extensions to be made and repaid through digital assets (such as crypto assets, including Bitcoin), or a national currency (such as the US Dollar). ASIC’s position was that the obligation to repay either a digital asset, or a national currency, amounted to a deferred debt and therefore the product was a credit facility, a subset of ‘financial products’ and attracted the DDO obligations.
In counter, BT contended that the product was a financial product under section 994B(3)(f), specifically a Margin Extension, which does not attract the TMD obligations under 994B(1) and (2). This was argued on the basis that a person who provides a Margin Extension doesn’t incur a ‘debt’ as the word ‘debt’ is limited to an obligation to pay money (ASIC Act regulation 2B(3)), and that the Terms of Service didn’t impose such obligation.
BT explored this argument further regarding the margin products that concerned digital assets. While a customer who received a Margin Extension in a digital asset may be required to return an equivalent amount of that asset, such digital assets aren’t considered money and therefore cannot constitute a debt. Reliance was placed on Justice Dixon’s judgment in Jolley v Mainka (1933) 49 CLR 242 at paragraph 260, where it was determined the obligation to pay an amount in a foreign currency doesn't create a debt.
ASIC did not argue that the digital assets should be considered money, but it did claim that BT’s proposed definition of debt was ‘unduly narrow’. Their submission was that, in applying the ‘practical and commonsense fashion’ of debt (Hawkins v Bank of China (1992) 26 NSWLR 562 (“Hawkins”) at 572 per Gleeson CJ), the obligation to return an equivalent digital asset amount, coupled with its prior advance, constituted a debt under ASIC Act regulation 2B(3)(a).
Finally, ASIC attempted to make a broad submission, arguing that the contravention was related to the availability of the Product, regardless of its structure or whether the customer used it with digital assets or national currencies.
Decision
In handing down his judgment, Justice Nicholas agreed with both ASIC and BT. The obligation to repay a digital asset didn’t constitute an obligation to repay money, and therefore could not be a considered a deferred debt that attracted DDO obligations. As such, BT hasn’t breached any obligations concerning the digital asset Margin Trading Products.
However, Justice Nicholas agreed with ASIC regarding the Margin Trading Products that offered extensions in a national currency. These products constituted a deferred debt, classifying them as a credit facility under the DDO regime. Consequently, BT breached regulations by failing to make a
As for penalties, ASIC and BT have been given until 30 August 2024 to agree on any declarations or injunctions that may apply. ASIC has publicly announced it will be seeking financial penalties against BT.
Key takeaways
While in this instance the digital assets didn’t constitute money or attract obligations for due to a classification as a ‘financial product’ under the Corporations Act or the ASIC Act, it’s a timely reminder ASIC continues to signal to the market that ‘entities providing crypto-related products should be aware that such products may be financial products.’
As ASIC Deputy Chair Sarah Court announced, ASIC will ‘continue to take action to ensure’ that consumers receive the full protection available, and that they will continue to operate and scrutinise products offered by both major international crypto firms, as well as smaller domestic products, to ensure regulatory compliance.
This also highlights the importance of assisting consumers, product issuers and other stakeholders. ASIC has published ASIC Information Sheet 225: Crypto Assets, which provides guidance on when a crypto-related offering may be considered a financial product. ASIC has indicated it plans to update Info Sheet 225 soon. It’s crucial for issuers to understand their obligations under various legislative regimes. We encourage you to contact us for any clarification or advice on this matter.
This article was written with the assistance of Thomas Webster, Law Graduate.
