- The United States CFTC has ordered Kraken to pay over a million dollars in penalties following the allegations that the exchange violated the Commodity Exchange Act.
- According to the regulator, the crypto exchange failed to register as a futures commission merchant prior to offering margined retail commodity transactions in digital assets.
- Kraken has limited its margin of crypto products since June 2021.
Cryptocurrency exchange Kraken will pay $1.25 million in settlement fees to the United States Commodity Futures Trading Commission (CFTC), which alleged that the firm offered illegal trading services and did not register with the regulatory entity.
CFTC to provide clarity on ‘rules of the road’ for crypto firms
The CFTC stated that the San Francisco-based digital asset exchange violated the Commodities Exchange Act when it offered margined cryptocurrency products from June 2020 for a year without registering with the agency beforehand.
One of the largest crypto exchanges in the world founded in 2011, Kraken, failed to register as either a futures commodity merchant (FCM) or designated contract market (DCM) with the CFTC before offering the margined crypto transaction services.
Companies that wish to list, trade or offer futures products must register as an FCM or DCM with the CFTC. According to the official press release, Kraken kept sole custody of the margined assets during the one-year period.
During this time, Kraken was said to have offered potential and existing US customers access to margined retail commodity transactions on the platform. The CFTC also added that the exchange also provided margin ratios of up to 5:1.
The acting director of enforcement at the agency, Vincent McGonagle, stated that the settlement was a part of a “broader effort to protect US customers.”
The settlement entails a fine of $1.25 million, which is also known as "civil monetary penalty" within a month and Kraken would need to halt offering of this type of margin to US citizens. The platform has also waived any rights to hearings or court reviews regarding the matter.
However, CFTC Commissioner Dawn Stump said that it might be difficult for the San Francisco-headquartered firm to comply with current regulations given the guidance around issues including the “actual delivery” of cryptocurrencies. It remains unclear how the digital asset exchange could be regulated as an FCM since the current rules around the regulation of traditional FCMs entities do not fit the crypto firm’s role as an exchange.
Stump added that a rule-maker procedure could be added to clear up the “rules of the road” for other cryptocurrency exchanges and companies in the future.
In June 2021, Kraken sought clarification on the CFTC’s margin trading regulations and limited its margin products.
The penalty imposed on the leading crypto exchange is considered small when compared to the company's $10 billion valuation. BitMEX, a crypto derivatives exchange was fined $100 million in August 2021 by the CFTC and the Financial Crimes Enforcement Network.
Earlier this year, the Internal Revenue Service (IRS) began conducting an “ongoing, extensive investigation involving substantial IRS resources” into cryptocurrency holders. The IRS is served “John Doe” summons on various cryptocurrency companies including Kraken to seek court orders to require digital asset exchanges to turn over account holder’s names and other key identifying information.