Crypto exchange Kraken to pay $1.25 million to settle CFTC charges

abdelaziz Fathi

San Francisco-based cryptocurrency exchange Kraken has agreed to pay a $1.25 million civil penalty as part of a settlement with the US Commodity Futures Trading Commission (CFTC).

The fine addresses charges that the major exchange illegally hosted leveraged cryptocurrency trades and failed to register as a futures commission merchant (FCM).

Kraken didn’t address the less savory uses of its platform for months, as the regulator says it accepted clients’ trades and funds and therefore acted as an Eligible Contract Participants (ECP), without registering as such with the CFTC.

Worse, Kraken served as the sole margin provider and maintained physical custody of all clients’ assets. As such, the platform operated a facility to trade cryptocurrencies without being approved as a Designated Contract Market.

According to the CFTC statement, the investigation focused on actions between June 2020 and July 2021 as the regulator revs up enforcement of the nascent industry.

“Where 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. Customers could not transfer assets away from Kraken until satisfying their repayment obligation. If repayment was not made within 28 days, Kraken could unilaterally force the margin position to be liquidated. Kraken could also initiate a forced liquidation if the value of the collateral dipped below a certain threshold percentage of the total outstanding margin. As a result, actual delivery of the purchased assets failed to occur,” the CFTC further explains.

The resolution to the CFTC’s tussle with the US second-largest crypto exchange is just the latest example of the regulators’ growing focus on regulating cryptocurrencies. Earlier in August, derivatives exchange BitMex paid a $100 million penalty in one of the biggest settlements ever against a cryptocurrency platform.

Elsewhere, Kraken is seeking approval to operate in Europe by the end of 2021, founder and CEO Jesse Powell said in an interview. Powell pointed out that Kraken has been already engaged in discussions with regulators in Malta, Luxembourg and Ireland.

Kraken’s UK subsidiary, Crypto Facilities, already holds authorisation from the UK Financial Conduct Authority to operate a multilateral trading facility (MTF). Obtaining an MTF license allowed the Kraken-owned firm to expand in ways that more closely resemble a traditional exchange, integrating multiple third-party buyers and sellers.

Kraken has recently expanded its operations in Asia. In 2020, it re-launched its trading services for Japanese residents, nearly two years after it exited the lucrative market.

Read this next

Interviews

CloudMargin’s Stuart Connolly on how to manage collateral amid high rates at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Stuart Connolly about CloudMargin’s SaaS platform, said to be the only cloud-native collateral and margin management system in the industry, at a time of stress due to rising interest rates.

Interviews

Baton Systems’ Alex Knight on solving post-trade with DLT at FIA Boca 2023

FinanceFeeds Editor-in-Chief Nikolai Isayev spoke with Alex Knight about Baton Systems’ about rising settlement fails, collateral management, and the profile of DLT beyond cryptocurrencies.

Industry News

Wise claims 92% of banks hide or inflate FX fees despite Cross-Border Payments Regulation 2

“Banks continue to exploit loopholes in EU regulation to mislead their customers and overcharge them through fees hidden in inflated exchange rates.”

Industry News

Goliath Partners opens Miami headquarters to recruit C++ developers for fintech and trading

I’m extremely excited to be pursuing this venture and having the backing of such knowledgeable entrepreneurs who have seen success time and time again. We’ve already made brilliant headway working with leading investment houses and trading exchanges. It’s just the start, but we’re already making a huge difference with our work.”

Industry News

IOSCO calls for cooperation against cross-border scams, greenwashing, misconduct, and fraud

“Regulators need effective resources, practices, tools, and techniques to promote consumer protection and market integrity, which is supported through participation in critical multilateral forums such as IOSCO.”

Institutional FX

Archax rolls out tokenization engine as LawtechUK confirms legal standing of tokens

“As the UK’s first FCA regulated digital securities exchange, we are now building on this to pave the way to make traditional assets interoperate with Web 3.0.”

Technology

Broadridge migrates bond e-trading platform LTX to AWS

“LTX is committed to offering innovative e-trading technology that facilitates transparency and liquidity discovery. By migrating to AWS, LTX can leverage the scalability of the cloud to continue to deliver enhanced data and execution capabilities to our clients.”

Executive Moves

CME Group taps Tim McCourt as Head of Financial & OTC Products as Sean Tully retires

“We appreciate the leadership Sean provided over the past decade for our financial products businesses, which included the successful migration to SOFR derivatives that now serve as the leading tool for hedging short-term interest rates. We are fortunate to have Tim McCourt, who has extensive experience across financial products, to lead these important business lines that allow our clients to manage risk in key asset classes.”

Industry News

Euronext’s ELITE launches WTC Lisboa academy to promote Portuguese companies

“The launch of this project helps shape our aligned objective of supporting entrepreneurs and executives in upskilling and empowering their strategies and business opportunities. For WTC Lisboa, this represents a milestone in its strategy of promoting the internationalisation of the Portuguese economy.”

<