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The Federal Court has made one of its first decisions on the application of the financial services law to crypto-backed products.
The Federal Court has found that fintech company Block Earner engaged in unlicensed financial services conduct when offering its crypto-backed Earner product to retail investors between March 2022 and November 2022.
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After the corporate regulator took enforcement actions against the AUSTRAC-registered digital currency exchange, the Federal Court found that, in offering this product, Block Earner was actually providing unlicensed financial services and operating an unregistered managed investment scheme. This was because the Earner product met the definition of a managed investment scheme and a facility for making a financial investment under the law.
Commenting on the ruling, Australian Securities and Investments Commission (ASIC) deputy chair Sarah Court said “the important decision” provided 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,” she said.
“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.”
The regulator also cautioned firms offering products with crypto assets to “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,” Ms Court said.
Parts of ASIC’s allegations weren’t successful, including the allegation that Block Earner’s variable yield crypto asset-based offering, known in ASIC’s proceedings as the access product, was a financial product.
“Block Earner markets this product as giving consumers access to decentralised finance (DeFi) lending protocols. ASIC considered this to be a financial product as it had the characteristics of a managed investment scheme, investment facility or derivative,” the regulator explained.
However, the court did not accept this characterisation.
The regulator will now seek orders from the Federal Court imposing pecuniary penalties, and a case management hearing has been set for 1 March 2024.
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