ICO regulatory update – guidance on ICOs and crypto-assets

ASIC has released an update to information sheet INFO 225: Initial coin offerings and crypto-assets. While ASIC’s position on when an ICO or crypto-asset will be a financial product remains largely unchanged (you can see our previous updates on the topic here and here), ASIC’s newest update acknowledges the changing nature of crypto-assets and the increased maturity of the market.

INFO 225 has placed heavy emphasis on the risks of an ICO or crypto-asset being a managed investment scheme (MIS) and has significantly increased the detail of the section as it deals with the potential for an ICO or crypto-asset to be considered to be an MIS. ASIC’s emphasis on the risk of an ICO or crypto-asset to be characterised as an MIS accords with our position that, unless the tokens are available for use on an existing platform, there is significant risk that your tokens could be characterised as an MIS, and as such you will require an Australian Financial Services License (AFSL) with the appropriate authorisations. It will not be sufficient to hold a corporate authorised representative agreement if you wish to issue interests in an ICO or crypto-asset that has been characterised as an MIS.

The updated INFO 225 now also clarifies that those who give advice, dealing or provide intermediary services for crypto-assets that are financial products will require an AFSL with appropriate authorisations. This includes those who act as crowdsource funding intermediaries.

Platform operators which enable customers to buy, sell or be issued crypto-assets which are financial products would require an Australian market license unless covered by an exemption. ASIC has noted that there are currently no licensed or exempt platform operators that allow consumers to buy, be issued or sell crypto-assets that are financial products.

Additionally, INFO 225 has now provided further guidance on circumstances where ICOs and an offering of crypto-assets will be a security. ASIC now considers that where a crypto-asset gives a purchaser the right to acquire shares in a company at a time in the future, then this may be an option, which is also a security.

To the extent that miners and transaction processors are part of the clearing and settlement process for tokens that are financial products Australian laws will apply. Additionally, wallet providers which store tokens that are financial products will require an AFSL with appropriate custody authorisations.

In a sign that ASIC’s views on the industry continues to mature, ASIC has inserted Part F to INFO 225, which explicitly addresses overseas categorisations of crypto-assets. ASIC’s view is that the opinions of international regulators do not automatically translate to equivalent products in Australia. This is because the definition of a financial product in Australia is often broader than in other jurisdictions.

ASIC considers that, where crypto-assets such as utility tokens may not be captured by regulatory regimes elsewhere, they may still be covered under Australian law. Importantly, where crypto-assets and ICOs are offered to overseas investors from Australia, Australian law may continue to apply, even where no Australians are included in an offer.

Additionally, ASIC has emphasised that the evolving nature of crypto-assets and ICOs means that disclosures need to be regularly reviewed and updated. This is especially the case where the design of the ICO or crypto-asset changes over the course of the product development life cycle. As the design of your product changes, it is important to ensure that what may not have been a financial product by initial design which becomes one as it matures has appropriate disclosure documentation prepared.

The key takeaway from this update is that ASIC’s views on the industry continue to evolve, and if you operate an ICO or crypto-asset business, you should ensure that you seek appropriate professional advice and engage with regulators where appropriate. Importantly, given the fluidity of the industry, it is important to ensure that legal advice provided is current with ASIC’s guidelines. Particular care should be taken to ensure that ICOs and crypto-assets are properly characterised, given ASIC’s view on the potential for ICOs and crypto-assets to be considered an MIS.