Kraken, one of the largest American cryptocurrency exchanges, will pay a $1.25 million fine to settle the U.S. Commodity Futures Trading Commission (CFTC) charges for violating the Commodity Exchange Act.
In a September 28 statement, the CFTC said that from June 2020 to July 2021, Payward Ventures Inc, doing business as Kraken, offered marginal retail commodity transactions in cryptocurrencies to U.S. citizens. However, they did not register as a futures commission merchant (FCM) with the agency.
“This action is part of the CFTC’s broader effort to protect U.S. customers,” said Acting Director of Enforcement Vincent McGonagle. “Margined, leveraged or financed digital asset trading offered to retail U.S. customers must occur on properly registered and regulated exchanges in accordance with all applicable laws and regulations.”
The CFTC also said that Kraken’s transactions were illegal “because they were required to take place on a designated contract market and did not. 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.”
Kraken did not admit any wrongdoing or deny the CFTC’s report. They cooperated with the investigation and were “proactive” in seeking guidance, according to the CFTC. Kraken agreed to desist from any further actions.
The fine against Kraken was a slap on the wrist. It was small relative to the sheer size of the San Francisco-based cryptocurrency exchange. Some estimates value the firm around $10 billion.
Setting an example with Kraken
The penalty only represents a tiny fraction of their value. Therefore, demonstrating that the relatively small penalty was a warning shot for non-compliance rather than dismissing or banning the entire industry.
As a comparison, the U.S. Treasury Department sanctioned Russia-based cryptocurrency exchange Suex for facilitating ransomware payments. In addition, Financial Crimes Enforcement Network and CFTC fined cryptocurrency derivatives exchange BitMex $100 million just a few months ago.
The CFTC could have cracked down on Kraken significantly harder if they decided to do so. Instead, it appears to simply be making the American exchange into an example.
Thus, showing the entire industry that they require all firms involved in marginal, leveraged, or financial digital asset trading to be properly registered with the government. In addition to abiding by all applicable laws and regulations.
Transparency is key
As someone who takes compliance risk seriously, I believe that when regulations are clear and transparent, cryptocurrency companies should do everything within their power to comply.
If they don’t understand a certain law, they should seek legal aid to carefully understand what the law means and how they can comply. It is also a good idea to directly build relationships with regulators. It is important to show them that the cryptocurrency community is willing to build out reasonable regulations that benefit the industry and customers.
That is the only way for the cryptocurrency industry to have a sustainable future. One that can continue to grow in a healthy fashion.
We must give credit where credit is due. In this case, the CFTC deserves recognition for showing good intent. It expressed its willingness to work with the cryptocurrency industry to develop reasonable and sustainable regulations.
The outcome will encourage more transparent dialogue between the government and the growing cryptocurrency industry in the future.
I expect that the CFTC will take thoughtful steps to promote clarity and innovation in the industry. It will likely promote and enforce standards among the cryptocurrency community and develop a formal U.S. policy on cryptocurrencies.
What the fine means for users
The fine is also positive for users, especially as the cryptocurrency industry grows and becomes more widely adopted.
Kraken is now aware that it cannot provide customers access to leveraged trading products without acquiring approval from the CFTC. Therefore, customers have peace of mind that the products and services they currently use are legal under the current law.
Users can feel safe when doing business with Kraken since they are committed to working with regulators to create a secure and robust cryptocurrency sector.
The American exchange made this commitment to regulators in a public statement. I believe it shows their wiliness to continue to work with the CFTC. To help regulate future cryptocurrency products and services:
“We are committed to working with regulators to try to ensure the rules governing digital assets create a level playing field globally — one that allows the crypto space in the U.S. to flourish while protecting the interests of individuals and the integrity of the industry.”
The economic and technological aspects of cryptocurrencies are unique and do require prudent regulation. Kraken appears to be willing to be a partner with regulators to make that happen.
Balancing regulation and innovation
The CFTC is emerging as a leader in regulation in the American cryptocurrency industry. Its light-handed approach with Kraken is another signal that it may help spur entrepreneurship and innovation in the cryptocurrency and blockchain industry.