Unlicensed conduct: crypto-asset earn products
ASIC has commenced civil penalty proceedings in the Federal Court against fintech company Block Earner. This proceeding follows other recent enforcement actions commenced by ASIC to protect investors from the harms posed by crypto-asset offerings.
Block Earner offers fixed-yield earning products based on crypto-assets (Earn Products). ASIC contends Block Earner was providing a financial service in relation to the Earn Products, on the basis it constituted a managed investment scheme, a facility through which a person makes a financial investment and/or a derivative.
ASIC’s allegation that the Earn Products constituted a managed investment scheme
The basis for ASIC’s allegation that the Earn Products constituted a managed investment scheme arose from Block Earner’s linking of investors with prominent decentralised finance lending protocols (Aave and Compound) which pay returns when an investor ‘stakes’ a stablecoin.
ASIC alleges that the Earn Products satisfied the three elements of a managed investment scheme, as the investor contributed money to Aave and Compound via Block Earner, in return for an interest in the scheme in the form of returns, with the individual assets pooled by a common enterprise and the investors lacking day-to-day operation of the scheme.
We note that ASIC has issued an information sheet which provides guidance on when a crypto-asset may be considered a financial product, including where a crypto-asset or initial coin offering may be classified as an interest in a managed investment scheme, an offer of a security, an offer of a derivative or a non-cash payment facility.
ASIC focus on crypto-assets
These proceedings demonstrate ASIC’s commitment to focus on crypto-assets as a core strategic project, as set out in its Corporate Plan for 2022-2026, and provides a practical application of the technology-neutral principle described in the Australian Law Reform Commission’s recent background paper on the regulation of crypto-assets.
In its media release, ASIC Deputy Chair Sarah Court said ‘Simply because a product hinges on a crypto-asset, does not mean it falls outside financial services law’. This comment is consistent with the ALRC’s view that whether a crypto-asset constitutes a financial product is to be driven by the function it performs, not the technology it involves.
The proceedings brought against Block Earner represent ASIC’s third enforcement action in the past two months targeting crypto-backed assets. Previous ASIC action includes:
- civil penalty proceedings were launched in October against Queensland based BPS Financial, alleging that BPS Financial made false, misleading or deceptive representations in the marketing of their crypto-asset token Qoin, as well as engaging in unlicensed conduct on the basis that the Qoin offering was a non-cash payment facility.
- interim stop orders were imposed on Holon Investments due to non-compliant target market determinations for three of their retail funds (which were each invested in individual crypto-assets). ASIC’s concern was that Holon Investments had not appropriately identified the target market based on the features and risks of the funds, specifying in its media release that crypto-assets are highly volatile and complex, making concentrated investments in a crypto-asset risky and speculative, which was not consistent with financial objectives, situation and needs for the specified target markets. Holon Investments is in the process of winding up the funds.
Summary of findings
It is not safe to assume that crypto-assets automatically fall outside of Australian financial services law. It is necessary to consider the nature of the product and whether it falls within the existing definition of a ‘financial product’.
Prior to offering any form of crypto-asset, we recommend that legal advice be obtained by appropriately experienced financial services lawyers that have a deep understanding of crypto-assets.
This article was written with the assistance of Thomas Webster, Seasonal Clerk.
Our Fintech and Blockchain Lead, Partner John Bassilios (and Blockchain Australia Director) has written the Australian chapter of the Lexology Getting The Deal Through Fintech 2023 publication.