Law requires issuers to determine the target market before offering financial products to customers
The Federal Court recently found that Bit Trade, a digital currency exchange provider, violated the Corporations Act 2001 by failing to issue a target market determination for its “Margin Extension” product.
The design and distribution obligations in Part 7.8A of the Corporations Act required financial product issuers to determine the target market for their product.
Bit Trade, a subsidiary of the US-based Payward Inc., operated the Kraken exchange, which allowed customers to trade digital assets such as cryptocurrencies. Since 2020, Bit Trade has offered the Margin Extension product to Australian customers and has allowed them to receive margin extensions in digital assets or legal tender for trading on the Kraken exchange.
The Australian Securities and Investments Commission (ASIC) brought a case against Bit Trade on the basis that it failed to comply with the design and distribution obligations by not issuing a target market determination before offering the Margin Extension product to retail clients, as required by s. 994B of the Corporations Act.
ASIC sought declarations of contravention, injunctive relief, and penalties against Bit Trade.
Bit Trade, on the other hand, denied liability. It argued that its product was exempt from the design and distribution obligations. It cited the Corporations Regulations 2001, which excluded certain credit facilities from the requirement of a target market determination.
Bit Trade also argued that its product, particularly when offered in cryptocurrencies, did not create a debt obligation as defined by the regulations. Cryptocurrency could not constitute a debt under the law since it was not considered money, Bit Trade claimed. The product involved notional transactions where funds were not physically provided to customers, Bit Trade added.
In Australian Securities and Investments Commission v Bit Trade Pty Ltd, [2024] FCA 953, the Federal Court of Australia issued a decision concluding that Bit Trade contravened s. 994B of the Corporations Act by offering its Margin Extension product without issuing a target market determination.
The court characterised the product as a credit facility, which fell within the scope of the ASIC Regulations 2001.
The customer would incur a “deferred debt” upon being provided with the Margin Extension product in national currency, including in Australian or US dollars, the court explained. The “deferred debt” would then be payable when the customer became ineligible to receive the product, the court said.
The court rejected Bit Trade's argument that the product's structure, which allowed for indefinite margin obligations without a fixed repayment date, exempted it from the design and distribution obligations. The potential for a debt to arise, even if contingent on future events, qualified the product as a financial obligation under the Corporations Act, the court decided.
The court said that it would determine the appropriate penalties for Bit Trade in a subsequent hearing.
