CFTC fines Kraken for illegal digital asset transactions, failure to register as FCM - 04 October 2021

The CFTC levied a $1.25 million penalty on Payward Ventures, which does business as digital asset exchange operator Kraken, for illegal off-exchange trading and for failing to register as a futures commission merchant (FCM). The agency found that Kraken, which consented to cease and desist from further Commodity Exchange Act violations, illegally offered margined retail commodity transactions in digital assets, including Bitcoin (In the Matter of Payward Ventures, Inc., September 28, 2021).

The CFTC stated that from June 2020 to July 2021, Kraken offered margined retail commodity transactions in digital assets to U.S. customers who were not eligible contract participants. The transactions were unlawful because they did not take place on a designated contract market as required.

Kraken was the sole margin provider, according to the order, and maintained physical or constructive custody of all assets purchased using margin for the duration of a customer’s open margined position.

The CFTC said that when a customer purchased an asset using margin, Kraken supplied the digital asset or national currency to pay the seller for the asset. Kraken required customers to exit their positions and repay the assets received to trade on margin within 28 days.

The order notes that customers could not transfer assets away from Kraken until repaying the assets received, and if repayment was not made within 28 days, Kraken could force the margin position to be liquidated. Kraken also could initiate a forced liquidation if the value of the collateral dipped below a specified threshold percentage of the total outstanding margin. As a result, the actual delivery of the purchased assets failed to occur, the CFTC said.

The CFTC determined that Kraken operated as an unregistered FCM by soliciting and accepting orders for and entering into retail commodity transactions with customers, and by accepting money or property to margin these transactions. Kraken will pay a $1.25 million civil monetary penalty, and cease and desist from further CEA violations.