CFTC levies $1.25 million penalty against Kraken — and Commissioner Stump weighs in on settlement

The Commodities Futures Trading Commission (CFTC) has filed and settled charges against Kraken for failing to register as a futures commission merchant and offering margin transactions in crypto. 

Kraken will pay a $1.25 million civil monetary penalty and refrain from further violations, according to a statement from the CFTC.

The agency claims the crypto exchange offered margin retail commodity transactions to U.S. customers without registering as a designated contract market (DCM). Kraken required users who purchased assets on margin to exit their positions and repay the assets within four weeks. If a user failed to meet requirements, Kraken could force liquidation. Because Kraken accepted orders, money and property to margin these transactions, the CFTC claims this also constituted illegal operation as a futures commission merchant (FCM).

Failing to obtain the FCM license and continuing to execute margin transactions from June 2020 to July 2021 was grounds for enforcement, according to the CFTC. Acting Director of Enforcement Vincent McGonagle said the settlement is part of a "broader effort to protect U.S. customers," in a statement announcing the case.

In a separate statement, CFTC Commissioner Dawn Stump said this case outlined the need for further clarity of the Commission's Final Interpretive Guidance on retail commodity transactions involving certain digital assets issued in 2020. 

"As the Guidance becomes increasingly relevant to the Commission’s enforcement program, I believe it is incumbent upon the Commission to undertake a rulemaking proceeding to supersede the Guidance by adopting binding and enforceable rules that will provide certainty to the marketplace and a shared understanding of the 'rules of the road,'" she wrote.

The referenced guidance was adopted two and a half years after its initial proposal and more than two years after its public comment period. Because of the significant time lapse between its proposal and institution, Stump called on the Commission to replace the guidance with updated rules and input from market participants. 

Stump also pointed out that even if Kraken had registered as an FCM, it remains unclear what regulations it would have to abide by. The transactions the CFTC took umbrage with would still have been illegal with am FCM registration, according to Stump, since Kraken also operates as an exchange. To be in the clear, Kraken would have also had to register as a DCM, and an entity holding both registrations would be "unprecedented," according to Stump. 

Though she agreed Kraken seems to act as an FCM, and therefore was in violation, applying these rules to exchanges that support retail commodity transactions is "uncharted territory," according to Stump.

"I believe that if the Commission is going to hold an exchange liable for operating as an unregistered FCM with respect to retail commodity transactions, it is incumbent upon the Commission to explain in a transparent manner the relevant legal requirements for such an entity that seeks to register as an FCM and how the Commission will apply them in enabling the entity to conduct business with U.S. customers," she wrote.

Reached for comment, a Kraken spokesperson told The Block:

“We appreciate that today’s settlement acknowledges our cooperation and engagement on the issue. 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."

"As a firm committed to reasonable regulation, we engaged with the CFTC about its proposed margin trading guidance and sought clarity about what the guidance would permit," the spokesperson continued. "In June of this year, we started limiting our margin products in the U.S. to eligible clients prior to entering into this settlement with the CFTC."