CFTC Accuses Kraken for Illegal Margin Trading, Fines $1.25M

UTC by Bhushan Akolkar · 2 min read
CFTC Accuses Kraken for Illegal Margin Trading, Fines $1.25M
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The CFTC argued that Kraken has violated the Commodity Exchange Act (CEA) while failing to register as a futures commission merchant but still offering margin trading services.

It seems fresh trouble has been brewing for crypto exchange Kraken. On Tuesday, September 28, the US Commodities and Futures Trading Commission (CFTC) slapped a $1.25 million fine on crypto exchange Kraken in civil monetary policies.

The CFTC also said that crypto exchange Kraken has violated the Commodity Exchange Act (CEA). The commodities regulator said that Kraken failed to register as a futures commission merchant. Furthermore, the CFTC has slapped a “cease and desist” order under the Exchange Act. Vincent McGonagle, the CFTC’s acting director of enforcement noted:

“This action is part of the CFTC’s broader effort to protect US customers. Margined, leveraged or financed digital asset trading offered to retail US customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations.”

The CFTC stated that in the period between June 2020 to July 2021, Kraken facilitated margined retail transactions in crypto. It also argues that Kraken offered these transactions to US customers who were not eligible contract participants.

The CFTC order further notes that Kraken served as the sole margin provider while maintaining physical custody of all assets purchased using margin. Kraken has changed its policy recently, however, up to June 2021 customers had to close and settle their position in 28 days.

Calling It As Unlawful Transactions

Referring to these transactions as unlawful, the CFTC explains:

“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 the customer fails to make the repayment in 28 days, Kraken would unilaterally liquidate the margin positions. Besides, the exchange could also initiate forced liquidation if the value of the collateral dropped below a certain threshold percentage of the outstanding margin. Thus, it resulted in the failure of the actual delivery of the purchased assets.

The CFTC notes that these transactions were supposed to happen on a designated market but did not. Thus, it refers to these transactions as unlawful. “Additionally, by soliciting and accepting orders for and entering into retail commodity transactions with customers, and accepting money or property (or extending credit in lieu thereof) to margin these transactions, Kraken illegally operated as an unregistered FCM,” the CFTC notes.

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Bhushan Akolkar

Bhushan is a FinTech enthusiast and holds a good flair in understanding financial markets. His interest in economics and finance draw his attention towards the new emerging Blockchain Technology and Cryptocurrency markets. He is continuously in a learning process and keeps himself motivated by sharing his acquired knowledge. In free time he reads thriller fictions novels and sometimes explore his culinary skills.

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