Landmark decision in ASIC versus Finder Wallet: exploring legal boundaries of crypto-assets

By John Bassilios, Max Ding and Wilson Lee

On 14 March 2024, the Federal Court of Australia delivered its decision in ASIC v Finder Wallet Pty Ltd [2024] FCA 228, where it dismissed ASIC’s action against Finder Wallet and its now-defunct cryptocurrency-based product, Finder Earn. The highly anticipated judgement is the first to explore the legal boundaries of ‘debenture’ under the Corporations Act 2001 (Cth) (Corporations Act) with respect to crypto-assets.

Finder Earn: the basics

Between February and November 2022, digital currency exchange provider, Finder Wallet, offered its crypto-based product, Finder Earn. To participate in the product, customers had to first apply for an account with Finder Wallet via the Finder App. Once an account was opened, customers could transfer money into their account with Finder Wallet. They could then use the funds as they wished to invest in cryptocurrencies available on Finder digital currency exchange and invest in the Earn product, thereby earning a return.

In the Earn product, customers’ funds were only converted and allocated to Finder Wallet for its own use if they specifically chose to acquire ‘TrueAUD’, an Australian dollar stablecoins. This process involved two steps:

• customers purchased TrueAUD with funds held in their account; and
• customers then transferred or allocated the TrueAUD to Finder Wallet.

In exchange, customers would receive an annual compounding return in Australian dollars (AUD) at rates of either 4.01% or 6.01% in certain situations. However, customers always had the option to return any unspent funds held in their account. They could choose not to spend the funds or transfer the funds back into their own bank accounts.

ASIC’s allegations

In December 2022, ASIC filed civil proceedings against Finder Wallet amidst their increased focus on the crypto industry due to an alleged rise in regulatory non-compliance cases within the sector. ASIC alleged the defendant corporate entity contravened the Corporations Act by breaching product disclosure requirements, failing to comply design and distribution obligations and providing unlicensed financial services in relation to Finder Earn. ASIC sought declarations and pecuniary penalties from the court.

All of ASIC’s claims depended on the central question of whether Finder Earn, in substance, qualified as a debenture under section 9 of the Corporations Act. If it did, then Finder Wallet had to hold an Australian Financial Services licence to offer the product at issue. Conversely, none of ASIC’s allegations would be made out if Finder Earn could not be classified as a debenture.

Relevant law

Under section 9 of the Corporations Act, ‘debenture of a body’ means: ‘a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money.’

The definition can be broken down into three elements:

• was there money deposited with or lent to the body;
• is there a chose in action (i.e. a right to sue to recover or obtain a sum of money); and
• if a chose of action exists, does it include an undertaking by the body to repay the money deposited or lent as a debt?

The court’s findings

The court tackled the issue of whether Finder Earn qualified as a debenture by applying the three-step test.

Was there money deposited with or loaned to Finder Wallet?

ASIC argued when customers transferred money into their Finder Wallet accounts, it could be characterised a ‘deposit’ in line with the first element of the debenture definition, as it is similar to a bank deposit. However, Justice Markovic rejected this, noting unlike bank deposits, the funds transferred to Finder Wallet weren’t intended to raise capital for the recipient entity. Instead, they were used by customers to purchase cryptocurrencies on the Finder App. Therefore, the funds couldn’t be seen as ‘lent to’ or ‘deposited with’ Finder Wallet under the Corporations Act, even though customers might be unsecured creditors for their account balances.

The court also ruled when customers used their Finder Wallet funds to buy TrueAUD, it wasn’t a deposit or loan to Finder Wallet. Rather, it was a ‘payment by the customer of AUD… in exchange for an equivalent amount of TrueAUD’. The cryptocurrency, not customers’ money, was then transferred to the digital currency exchange provider for its own use. Did a chose in action exist?

The court was satisfied that customers who bought the Finder Earn product had a chose in action. This meant when they made the purchase, they had a contract with Finder Wallet. According to this contract, they were entitled to receive a certain amount of TrueAUD and returns at the end of a specific period. However, Justice Markovic noted ‘not every chose in action, which includes an undertaking to make payment a sum of money… constitutes a debenture’ of the kind envisaged by section 9 of the Corporations Act. She stated the ‘same may be said of an undertaking to make payment of a sum of TrueAUD’.

Did Finder Wallet ‘undertake’ to repay funds ‘deposited or lent’ as a debt?

The court discussed the third element of the Corporations Act’s s debenture definition, which imports ‘the notion of an undertaking to repay a debt comprising a loan made to the company as part of its working capital’. Justice Markovic found even if there was in fact a loan or deposit of money, that loan or deposit was, on balance, not made to Finder Wallet as part of its working capital.

The court explained while Finder Earn could use the TrueAUD transferred to it as needed, Finder Earn’s main goal was to ‘promote the growth and use of the Finder App’. The returns customers received depended on how much value Finder Earn added to the app.

Instead of a traditional debt repayment, Finder Wallet made a ‘contractual promise’ to repay  customers the TrueAUD they allocated, plus any returns. Although Finder Earn was described using terms such as ‘lending’ and ‘loans’, the contractual obligation wasn’t the same as ‘usual fundraising activities traditionally associated with the issue of debentures’.

Outcome and orders

ASIC failed to establish Finder Earn met the definition of a debenture under section 9 of the Corporations Act. Therefore, none of the alleged contraventions by ASIC could be confirmed. The court dismissed the proceedings costs and ordered ASIC to pay Finder Wallet’s legal fees.

ASIC indicated it will review the decision carefully. It has 28 days from the date of judgment to lodge an appeal application with the Full Federal Court.

Significance

This case offers insight into how similar crypto-related products or services might be considered under financial services law in the future. It suggests courts will examine the actual substance and mechanics of a crypto-based product, rather than just its appearance.

Importantly, the Finder Wallet judgement offers guidance for digital currency exchanges on how to issue their earn products to avoid being classified as a debenture. However, there’s still a risk of ASIC claiming that an earn product is a managed investment scheme, as seen in the Block Earner case.