Kraken will pay $1.25 million to settle charges with the Commodity Futures Trading Commission (CFTC) that it offered illegal margined digital asset transaction services and did not register as a futures commodity merchant (FCM) with the regulatory agency.

The CFTC found Kraken violated the Commodities Exchange Act by offering margined crypto products between June 2020 and June 2021 without registering as either a Designated Contract Market (DCM) or FCM. Entities hoping to list or trade futures products must register as an FCM, while a DCM license is needed to offer futures products.

Kraken maintained sole custody of the margined assets, according to a CFTC press release.

“During the relevant period, Kraken offered potential and existing U.S. customers the ability to enter into margined retail commodity transactions on its exchange,” an order issued by the CFTC said. “Margined trading was available to any U.S. person who Kraken approved for a user account.”

The exchange offered margin ratios of up to 5:1, according to the order.

Under the terms of the settlement, Kraken will pay the $1.25 million fine within 30 days and cease offering this type of margin to U.S. persons. The exchange is also waiving its right to any hearings or court review.

CFTC Commissioner Dawn Stump announced in a concurring statement that it may be difficult for Kraken to comply with the law given the current guidance around issues like “actual delivery” of digital assets.

Stump said it was unclear how Kraken could be regulated as an FCM, noting that it would be “unprecedented” for a company to be registered as a DCM and FCM at once. Kraken is not registered as either, according to the NFA database.

“How Kraken would be regulated as an FCM is not entirely clear, because many of the Commission’s rules governing its regulation of traditional FCMs do not fit Kraken’s role as an exchange,” she said.

The Commissioner proposed opening up a rule-making procedure to provide clear “rules of the road” for exchanges and other crypto entities to abide by.

In a statement, a Kraken spokesperson said, “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.”

Kraken “sought clarity” around the CFTC’s margin trading guidance and began proactively limiting its margin products in June 2021, the statement said.

“As Commissioner Stump recognizes in her concurrence, this enforcement action comes in the absence of a clearly articulated path to offering margin spot products to retail investors. We believe that such a path would benefit the U.S. digital asset industry and U.S. investors writ large. Kraken looks forward to engaging productively on these issues in the future,” the statement said.

Zack Seward contributed reporting.

UPDATE (Sept. 28, 2021, 20:51 UTC): Adds additional context and a statement from Kraken.