On September 28, 2021, the CFTC issued an order filing and settling charges against respondent Payward Ventures, Inc. d/b/a Kraken, a Delaware corporation with its principal place of business in San Francisco, California (Kraken), for illegally offering margined retail commodity transactions in digital assets and failing to register as a futures commission merchant (FCM). The CFTC order requires Kraken to pay a $1.25 million civil monetary penalty and to cease and desist from further violations as charged under Sections 4(a) and 4d of the Commodity Exchange Act (CEA) (7 U.S.C. §§ 6(a) and 6d).

Kraken operates of one of the largest online digital asset exchanges in the US that enables customers to engage in retail commodity transactions including the purchase and sale of digital assets such as Bitcoin. The CFTC also noted that Kraken provides margin extensions to some of its customers, which they can use to buy or sell digital assets on the Kraken exchange on a leveraged basis. According to the CFTC order, Kraken has never been registered with the CFTC.

According to the order, during the period of June 2020 to July 2021, Kraken offered margined retail commodity transactions in digital assets to US customers who were not eligible contract participants (ECPs). According to the order, Kraken served as the sole margin provider and maintained physical and/or constructive custody of all customer assets purchased using margin on the Kraken exchange for the duration of a customer’s open margined position. The CFTC found that when a Kraken customer purchased an asset on margin, Kraken supplied the digital asset or fiat currency to pay the seller for the asset. Kraken also required customers to exit their positions held with Kraken and repay the assets received to trade on margin provided by Kraken within 28 days. Under Kraken's terms and conditions with its customers, customers could not transfer assets away from Kraken until satisfying their repayment obligation to Kraken. The CFTC found that Kraken could unilaterally force the customer's margin position to be liquidated if repayment to Kraken was not made within 28 days. The CFTC also found that Kraken could initiate a forced liquidation of the customer's positions if the value of the collateral dipped below a certain threshold percentage that would cause actual delivery of the purchased assets to fail to occur. For details on CFTC guidance regarding actual delivery of digital assets (CFTC 2020 actual delivery guidance), see Legal Update, CFTC Issues Final Rule on Actual Delivery of Digital Assets.

The CFTC found that these transactions violated CEA Sections 4(a) and 4d(a)(1) because the transactions were required to take place on a designated contract market (DCM). The CFTC further found that, during the relevant period, Kraken violated CEA Section 4(a) by illegally offering to enter into, entering into, executing, and/or confirming the execution of off-exchange retail commodity transactions with US customers who were not ECPs. The CFTC also found that Kraken operated as an unregistered FCM in violation of CEA Section 4d(a)(1) by soliciting and accepting orders for and entering into retail commodity transactions with customers and accepting money or property (or extending credit) to margin these transactions.

Under the terms of the CFTC order, Kraken agreed to cease and desist from violating CEA Sections 4(a) and 4d(a)(1) and to pay a civil monetary penalty in the amount of $1,250,000 within ten days after entry of the CFTC order.

CFTC Commissioner Dawn D. Stump issued a concurring statement noting that it is incumbent on the CFTC to undertake a rulemaking proceeding to supersede the CFTC 2020 actual delivery guidance by adopting binding and enforceable rules that will provide certainty to the marketplace regarding actual delivery of digital assets.