ASIC’s landmark win against BPS Financial sheds light on financial services law boundaries regarding crypto

By John Bassilios and Max Ding

On 3 May 2024, the Federal Court of Australia handed down its landmark judgement in ASIC v BPS Financial Pty Ltd [2024] FCA 457 (ASIC v BPS). This was ASIC’s first win in court against a non-cash payment (NCP) facility involving crypto.

The court found BPS Financial Pty Ltd (BPS) engaged in unlicensed conduct when offering consumers its crypto-based product, the ‘Qoin Wallet’, which used a digital currency token named ‘Qoin’. Significantly, while Justice Downes found Qoin Wallet amounted to a ‘financial product’ under Australian financial services law, she held BPS’s entire Qoin Facility did not qualify as such.

The seminal decision signals courts will likely adopt a ‘substance over form’ approach when applying key regulatory concepts to evolving financial technology in the future, amid ASIC’s increasing scrutiny of offerings by the crypto industry. The case also clarified the legal principles relating to the authorised representative exemption to the requirement of holding an Australian Financial Services (AFS) licence. This may have important implications for how ASIC will interpret and apply the exemption moving forward.

Background

From 2020, BPS developed and made available to the public the Qoin Facility, a system for making and receiving NCPs using Qoin, which consumers would use to purchase goods and services from merchants registered with BPS.

Up to 30 September 2022, the Qoin Wallet was issued more than 93,000 times and BPS received more than $40 million from the sale of Qoin tokens.

In October 2022, ASIC commenced civil penalty proceedings against BPS. Broadly, ASIC alleged BPS unlawfully carried on a financial services business without holding an AFS licence, in contravention of sections 911A(1) and 911A(5B) of the Corporations Act 2001 (Cth) (Corporations Act) (Allegation 1). Additionly, ASIC alleged  BPS made false and misleading representations in connection with the supply or use of a financial product (Allegation 2).

We discuss two critical issues considered by Justice Downes for the purposes of determining Allegation 1:

• first, what the financial product consisted of on the facts of the case (Issue 1); and
• secondly, whether BPS could rely on the authorised representative exemption under section 911A(2)(a) of the Corporations Act in respect of its issuing of, and provision of financial advice on, a financial product (Issue 2). For Issue 2, what is significant to take away is not so much the facts of the case than the court’s clarification of the legal principles relating to the authorised representative exemption. Therefore, we focus more attention on the clarified legal principles.

Issue 1: the relevant financial product on the facts

Relevant law regarding ‘financial product’

It’s common ground between ASIC and BPS the relevant crypto-based product, as they define according to their respective cases, falls within the third limb of the definition of ‘financial product’ in section 763A(1) of the Corporations Act. That is, ‘a facility through which, or through the acquisition of which, a person … (c) makes non-cash payments’ within the meaning of section 763D.

Section 763D(1) of the Corporations Act provides a person makes ‘non-cash payment’ if they make payments, or cause payments to be made, otherwise than by the physical delivery of Australian or foreign currency in the form of notes and/or coins.

Meanwhile, section 762C of the Corporations Act defines ‘facility’ to include:

• intangible property; or
• an arrangement or a term of an arrangement (including a term that is implied by law or that is required by law to be included); or
• a combination of intangible property and an arrangement or term of an arrangement.

Under section 762B of the Corporations Act, if a financial product is a component of a facility that also has other components, Chapter 7 of the Corporations Act applies only in relation to the facility to the extent it consists of the component that is the financial product.

What constituted the actual ‘financial product’ at issue: the Qoin Wallet or the Qoin Facility?

As noted above, the court found the Qoin Wallet constituted a financial product in the form of an NCP facility but dismissed ASIC’s argument that the entire Qoin Facility qualified as such. To grasp how the court arrived at this finding, it’s important to understand the basics of BPS’s crypto offering.

The Qoin Wallet was a software product with the function of viewing both the balance of Qoin tokens for a wallet address recorded on the blockchain, and the payment facility (the function to send and receive Qoin tokens and for the transaction to be recorded). Crucially, the Qoin Wallet was an integrated component of the Qoin Facility, which was made up of other various elements such as the Qoin Blockchain, the Qoin Wallet App and the smart contracts required for the Qoin Facility to operate.  The Qoin Blockchain was a decentralised, distributed ledger that stored a record of all transactions using Qoin. The Qoin Blockchain network only had seven connected digital devices called ‘nodes’, each of which hosted a copy of the whole blockchain, validated transactions and propagated them across the network.

ASIC contended the various elements of the Qoin Facility combined amounted to a ‘single scheme’ implemented by BPS for a ‘substantial purpose of enabling consumers who choose to participate in it to make payments for goods and services otherwise than by the physical delivery of cash’. ASIC drew on the aspect of the legislative definition of ‘facility’, which includes the word ‘arrangement’, arguing: ‘it is not the mechanism of payment that is a facility, but rather the arrangement under which a (non-cash) payment was made.’

Justice Downes rejected ASIC’s contention and held:

• a financial product’s functionality requires integration with another product, facility or thing, doesn’t necessarily mean the other product, facility or thing forms part of the financial product;
• the system where a facility operates is not itself a financial product capable of being ‘issued’ or ‘acquired’, allowing for ‘dealing’ in it may occur as contemplated by sections 766A(1)(b) and 766C of the Corporations Act; and
• the identification of the financial product should focus on the point where a person performs one of the functions identified in section 763A(1) of the Corporations Act (ie make a financial investment, manage a financial risk, or make NCPs) with the test being ‘what is the direct mechanism or thing which is allowing the person to perform this function?’.

Her Honour then applied the legal principles above to the facts of the case:

• each Qoin Wallet was built on the Qoin Blockchain, where there was only one, existing separately from each Qoin Wallet. While the capability to create NCPs using a Qoin Wallet depends on the existence of the Qoin Blockchain, it didn’t simply the Qoin Blockchain itself is a financial product or that it formed part of the financial product.
• The Qoin Blockchain and various other elements weren’t the mechanism or components of a mechanism that allowed the user to make the NCP. One couldn’t ‘deal’ in the Qoin Blockchain (or other facets of the Qoin Facility), which may be distinguished from BPS’s ability to ‘issue’ Qoin Wallets. This conclusion is supported by the examples of the actions that qualify as making NCPs as provided in section 763D of the Corporations Act.

For these reasons, the court found the financial product, as defined in section 763A of the Corporations Act, was solely the Qoin Wallet. This specifically refers to the arrangement between BPS and each user, enabling the user to make NCPs upon the issue of the Qoin Wallet. This was even though Qoin Facility was relatively centralised in nature, with the Qoin Blockchain merely comprising seven nodes.

Issue 2: BPS’s claim in respect of the authorised representative exemption

Relevant law regarding the ‘authorised representative exemption’

Section 911A(2)(a) of the Corporations Act exempts a person from the requirement to hold an AFS licence. This exemption applies when a person provides financial service ‘as representative of’ a second person who carries on a financial services business and who:

• holds an AFS licence covering the provision of the service; or
• is otherwise exempt from the requirement to hold an AFS licence.

In other words, section 911A(2)(a) would require BPS provide the financial services ‘as representative of’ the relevant AFS licensees — Billzy Pty Ltd (Billzy) and PNI Financial Services Pty Ltd (PNI) — both who BPS entered into authorised representative agreements with respectively.

Up until 2023, the term ‘representative’ was defined in section 910A (now in section 9) as an authorised representative of the licensee or, among other things, any other person acting ‘on behalf of’ the licensee. Additionally, an ‘authorised representative’ was formerly defined in section 761A (now in section 9) as a person authorised in accordance with section 916A or 916B to provide a financial service(s) ‘on behalf of’ the licensee.

Relevantly, section 916A(1) provides a financial services licensee may give a person (the authorised representative) a written notice authorising the person, for the purposes of Chapter 7, to provide a specified financial service(s) ‘on behalf of’ the licensee.

The court’s clarification of the legal principles concerning the authorised representative exemption

ASIC’s fundamental challenge to the authorised representative arrangements entered into by BPS is its argument that:

• to be an authorised representative, the authorisation must be on the basis the financial services will be, and are, provided on behalf of the ASF licensee as its agent; and
• given BPS was the ‘issuer’ of, and the provider of advice in relation to, the Qoin Wallet, BPS was not an authorised representative of Billzy/PNI.

ASIC leaned in on the phrase ‘on behalf of’ within the provisions outlined above, contending the statutory defining attribute of the concepts of ‘representative’ and ‘authorised representative’ is acting on behalf of the principal and ‘on behalf of’ means ‘as representative of’ or ‘for’ the relevant persons.

Justice Downes nevertheless disagreed with ASIC on these points. Her Honour noted the words ‘on behalf of’ don’t appear in the relevant exemptions in section 911A(2), and ASIC’s construction isn’t supported by the text of section 911A(2)(a). Instead, the phrase ‘on behalf of’ is pertinent to determining whether and in what respect BPS is an authorised representative of Billzy/PNI.

The court held as long as the authorised items fall within the scope of the AFS licence, there is no:

• limitation on a person not being able to be an authorised representative in relation to a financial product if they themselves also happen to be the ‘issuer’ of the product; or
• limitation an AFS licensee cannot appoint an authorised representative to engage in conduct regarding a financial product where the licensee isn’t the issuer.

Other than the restrictions under section 916A(3), the AFS licensee is free to determine the circumstances it will be prepared to authorise a person to act on its behalf, and to determine what’s required from that authorised representative. In this manner, the AFS licensee is also at liberty to decide what an authorised representative acting ‘on its behalf’ will look like in any given instance.

Moreover, referring to the appearance of the terms ‘agent’ and ‘other representative’ in section 766C(3) of the Corporations Act, as well as the absence of the word ‘agent’ in the definitions of ‘authorised representative’ and ‘representative’, the court held the word ‘representative’ isn’t to be construed synonymously with ‘agent’.

In the end, the court made clear the authorised representative exemption under section 911A(2)(a) applies:

• to a person who provides a financial service;
• if that person has been given a written notice by an AFS licensee authorising the person, for the purposes of Chapter 7, to provide the specified financial services on behalf of the licensee; and
• where the relevant AFS licence covers the provision of the specified services.

The nature of the specified financial services, in reality, hinges on the interpretation of the particular authorised representative agreement. For the purposes of section 916A(1), the only necessary form of authorisation is one that permits the recipient to provide a specified financial service(s) on behalf of the licensee. This means it doesn’t necessarily matter if an authorised representative agreement doesn’t expressly use the words ‘on behalf of’.

Although Justice Downes disagreed with ASIC regarding the interpretation of the authorised representative exemption, ultimately, she found the authorised representative agreements between BPS and Billzy don’t, by their express terms, authorise BPS to either issue or provide general financial advice about the Qoin Wallet. Therefore, BPS couldn’t rely on these agreements to claim exemption under section 911A(2)(a). By contrast, under its representative agreement with PNI, BPS was authorised to provide financial advice and issue the Qoin Wallet.  On that basis, BPS was exempt under section 911A(2)(a) during the ten-month period of the PNI authorised representative agreement.

Outcome

Regarding Allegation 1, the court found BPS, since January 2020 — except the period where BPS was an authorised representative of PNI — had breached the Corporations Act, as it neither held an AFS licence nor was it authorised by a licence holder to issue or provide financial product advice concerning the Qoin Wallet.

Regarding Allegation 2, BPS was found to have made false or misleading representations about the Qoin Wallet, including:

• the Qoin Wallet was officially registered or approved when it wasn’t;
• the Qoin Wallet could be used to purchase goods and services from a growing number of Qoin merchants, when, in fact, it was declining; and
• buyers of Qoin tokens could be confident they would be able to exchange them for other crypto-assets or currency, such as Australian dollars through independent exchanges, when no such exchanges existed.

A further hearing to determine the outstanding questions in the proceeding, including the relief sought by ASIC, will be held on a date to be fixed later in 2024.

It’s worth noting BPS also has a related ongoing class action against it alleging misleading conduct and unconscionable conduct that induced investors to acquire or invest in Qoin, which ultimately lost all its value and resulted in loss and damage to the investors.

Takeaways

This decision marks ASIC’s first victory against an NCP facility involving crypto. It t stands in stark contrast to the mixed results in the recent string of crypto enforcement lawsuits launched by the regulator, including:

• the Block Earner case (where ASIC succeeded in establishing contravention relating to the centralised Earner product, but failed to do so relating to the decentralised Access offering); and
• the Finder Wallet case (where ASIC failed to argue a crypto-based product constituted a ‘debenture’, albeit this case is being appealed).

You can read our previous analyses on both those cases here: Block Earner article and Finder Wallet article.

ASIC v BPS also serves as an important reminder many crypto-based products could qualify as a ‘financial product’ under the Corporations Act, as providers must comply with the relevant regulatory obligations when offering services in relation to them. ASIC Information Sheet 225: Crypto-assets gives guidance on the circumstances where a crypto-based offering may classify as a financial product.

Despite ASIC’s overall success in the lawsuit, the court disagreed with the financial watchdog on multiple points:

• In line with the Finder Wallet case mentioned above, ASIC v BPS demonstrates courts will look at the actual mechanics of a crypto-related offering, as opposed to just its form, when engaging with existing financial services law. This is evidenced by Justice Downes’ incisive differentiation of the Qoin Wallet from the other features of the entire Qoin Facility when discerning what really was the ‘financial product’ at the heart of the proceedings.
• Moreover, the court cast doubt on ASIC’s long-standing view that the authorised representative exemption is only available when the person is acting as an ‘agent’ of the AFS licensee but cannot be relied on if the person is acting as a ‘principal’ (for example, by issuing, varying or disposing of a financial product, which ASIC has been seeing as the action of a principal).^[1] This could change the way ASIC approaches the exemption going forward.