Do you have a licence for that? ASIC claims victory over crypto-asset Fintech's unlicensed conduct

The Federal Court judgment on Block Earner's crypto-backed product "Earner" arrives against a backdrop of scrutiny of the crypto industry, with the Government seeking to introduce a digital asset regulatory framework and ASIC actively pursuing civil penalty proceedings against crypto providers for a wide scope of issues, even where the Fintech pulled the product following an ASIC warning.

MIS, investment facility or derivative?

ASIC alleged that two of Block Earner's products, a fixed-yield product "Earner" and a decentralised financial access product "Access", contravened the Corporations Act on the basis that they were each a managed investment scheme, an investment facility and a derivative which were operated without a relevant Australian financial service licence (AFSL). While Justice Jackman didn't find that Earner was a derivative, he did find that it was a managed investment scheme and an investment facility. The proceedings over the Access product were dismissed on all three claims.In the Earner product, users contributed cryptocurrency in exchange for the financial benefit of a fixed interest yield. Justice Jackman applied the statutory tests for each of the alleged characterisations and found that Block Earner had facilitated the financial benefit described above by both operating a managed investment scheme and making a financial investment. The Court found that the features of the Earner product met the three limbs of the definition of a managed investment scheme. The investors in the Earner product effectively contributed money or money's worth (regardless of the conversion into cryptocurrency) in a common fund which was lent to third parties to generate a return without day-to-day control over how their funds were managed. Each of these characterisations required Block Earner to have held an AFSL and, as the managed investment scheme had more than 20 members, to have complied with the requirements for a registered managed investment scheme.However, Justice Jackman held off from further finding that the product was a derivative, as the definition of derivatives excludes certain managed investment schemes. Meanwhile, the Access product, which provided access to decentralized finance lending protocols, was not found to meet any of the three statutory tests. A key feature was that users retained ownership of their individual tokens and therefore, Block Earner's involvement could be described as that of a broker which effected transactions on behalf of its customers.

Unanswered questions

Justice Jackman commented on the unresolved question of whether cryptocurrency may be property under the legal definition of the word. This carries implications under the financial services regime, in particular whether crypto-asset providers hold cryptocurrency on trust for scheme members as property as per the definition of a managed investment scheme. However, the question was not relevant to deciding this case and remains subject to future clarification by the Court.

ASIC response

ASIC Deputy Chair Sarah Court said: "This important decision provides some clarity as to when crypto-backed products should be considered financial products which require licensing under the law. Crypto-assets are risky, inherently volatile and complex. ASIC remains concerned that consumers do not fully appreciate the risks associated with products involving crypto-assets and today's decision is an important step forward to ensuring there are appropriate protections for consumers. Firms offering products with crypto-assets must carefully consider whether their offerings are financial products under the existing regime. And, if they are, ensure that they are appropriately licensed and authorised before distributing them."

Helpful terms

• MIS: A scheme into which people's contributions are pooled to produce financial benefits (section 9 of the Corporations Act).
• Derivative: An arrangement where the value of the arrangement, to be provided at some future time, is determined by reference to the underlying asset, rate, index or commodity (section 761D of the Corporations Act).
• Investment Facility: A facility in which a person uses an investor's contribution to generate a financial return, including where no return is generated but the investor or the person intends to do so (section 763B of the Corporations Act).