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.

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