In 2023, the Australian Securities and Investments Commission (ASIC) identified misconduct involving crypto assets as a key enforcement objective.[1] Crypto assets also form part of ASIC’s Corporate Plan 2023-2027. ASIC’s 2023 enforcement policies were closely followed by Treasury’s ‘Regulating Digital Asset Platforms’ paper, which proposed to place digital asset platforms within the ambit of Australia’s financial services framework and licensing regime. Exposure draft legislation based on the proposal is expected to be released in late 2024.[2]
Against this policy focus, ASIC v BPS Financial Pty Ltd[3] (BPS Financial) and ASIC v Bit Trade Pty Ltd[4] (Bit Trade) are two recent successful claims brought by ASIC in the Federal Court of Australia, which have examined the intersection of cryptocurrency products and Australia’s financial services regulatory framework.
Crypto assets remain firmly in ASIC’s cross-hairs, with ASIC’s application for interim injunctions against blockchain mining companies, NGS Digital Pty Ltd and NGS Group Ltd, listed for a case management hearing in the Federal Court on 23 October 2024.[5]
Watch this space …
BPS Financial
- BPS Financial marketed a digital currency product called Qoin, with the aim of building a cryptocurrency ecosystem within Australia to allow businesses to trade using digital currency backed by blockchain technology.
- ASIC’s main allegations were that BPS Financial carried on a financial service business without an Australian Financial Services License (AFSL) (in breach of section 911A(1) of the Corporations Act) (Unlicensed Conduct Case) and that it misrepresented the regulatory status of Qoin (Misleading Conduct Case).
- There was a preliminary dispute as to the identity of the relevant ‘financial product’ under the Corporations Act. ASIC contended that the Qoin Facility (the non-cash payment facility which allowed users to transact using Qoin) constituted the relevant ‘financial product’, whilst BPS contended that it was the Qoin Wallet alone (a component of the Qoin Wallet App which had the function of both viewing the balance of Qoin for a wallet address, and the payment facility to send and receive Qoin and for the transaction to be recorded). The Court sided with BPS.[6]
Unlicensed Conduct Case
- BPS Financial structured its operations through a non-cash payment system supported by Authorised Representative Agreements with two authorised AFSL holders (Billzy Pty Ltd and PNI Financial Services Pty Ltd) and sought to rely upon the exemption under sections 911A(2)(a) and (b) of the Corporations Act to argue that its relationship with these existing AFSL holders was sufficient to cover its activities.[7]
- The Court rejected BPS Financials’ argument that it could rely on the exemptions under sections 911A(2)(a) and (b) of the Corporations Act on the basis that the Authorised Representative Agreements had the effect that BPS Financial operated in a dual capacity as both issuer and authorised representative. This was not an arrangement that met the exemptions under the Corporations Act.
- The Court determined that, with the exception of the period in which an Authorised Representative Agreement with PNI Financial Services Pty Ltd was in place (being from 5 November 2020 to 30 August 2021), BPS Financial had provided financial services without an AFSL.
- BPS was therefore required to have obtained its own AFSL and could not rely upon its separate contractual arrangements with AFSL holders.[8]
Misleading Conduct Case
- As to the Misleading Conduct Case, ASIC particularly focused upon BPS Financial’s promotional materials, including its White Paper, which made four key representations in relation to Qoin, being that:
- it could be exchanged for fiat currency or other cryptocurrencies through independent exchanges (Trade Representation);
- it could be used to purchase goods and services with a growing number of merchants (Merchant Growth Representation);
- it was officially approved and registered with records maintained by the government (Approval / Registration Representation); and
- it fully complied with Australian financial services laws, including that BPS Financial maintained all required financial services licences (Compliance Representation).[9]
- The Court did not accept BPS Financial’s argument that the representations made were either opinion or forward-looking statements, and were not factual promises. It found that BPS Financial breached the ASIC Act by making the Trade Representation, Merchant Growth Representation, and Approval / Registration Representation without reasonable grounds, for the following reasons:
- Trade Representation – for the period of 21 November 2021 to in or around July 2023, the statement that there would be independent exchanges available to facilitate the transfer of Qoin into fiat currency or other crypto products, was misleading or deceptive, or likely to mislead and deceive since no listings on independent exchanges were available;[10]
- Merchant Growth Representation – BPS Financial had experienced a consistent decline in the use of Qoin. The basis for the statement that the number of Qoin users would increase was not sufficient for a reasonable person to believe; and[11]
- Approval / Registration Representation – Qoin had neither been registered nor approved by the relevant authority, ASIC. The use of such terms would likely mislead an ordinary or reasonable member of the audience into believing that proper registration had taken place.[12]
- With respect to the Compliance Representation, the Court held that ASIC had not established its case on this limb of the Misleading Conduct Case. BPS Financial had made the Compliance Representation based on the genuine belief that Qoin was “fully compliant” with relevant laws and in reliance on expert legal advice. The Court held that the average person would consider the Compliance Representation a statement of an opinion rather than a statement of fact.[13]
Civil Penalty
- ASIC has appealed Justice Downes’ conclusions that (i) BPS Financial was exempt under section 911A(2)(a) of the Corporations Act for the period of time in which it held an Authorised Representative Agreement with PNI Financial Services Pty Ltd, and (ii) in holding that an authorisation, for the purposes of section 916A of the Corporations Act, can authorise a person (in this instance BPS Financial) to issue, on behalf of an AFSL holder, a financial product of which the AFSL holder is not the issuer.
- The imposition of any civil penalties against BPS Financial under the Corporations Act and the ASIC Act will therefore be determined once ASIC’s appeal has been resolved.[14]
Bit Trade
- ASIC alleged that Bit Trade Pty Ltd, a cryptocurrency exchange operator, contravened sections 994B(1) and (2) of the design and distribution obligations (DDO) in Part 7.8A of the Corporations Act by offering a financial product, called Margin Extension, without making a target market determination (TMD).
- Margin Extension allowed users to purchase cryptocurrencies on the Kraken crypto-currency exchange using leverage of up to five times the value of the collateral held in their Kraken account (margin).[15] ASIC claimed that this financial product required a TMD, which Bit Trade had not issued.
- The principal question in dispute was whether Margin Extension was a financial product which fell within the scope of section 994B of the Corporations Act (ASIC’s case), or whether it fell within the scope of the exemption in reg 7.8A.20(9)(c)(ii) of the Corporations Regulations which excluded from the TMD requirement a credit facility that did not involve credit of a kind referred to in sub-reg 2B(3)(a) of the ASIC Regulations (Bit Trade’s Defence):[16]
“credit” means a contract, arrangement or understanding:
(a) under which:
(i) payment of a debt owed by one person (a debtor) to another person (a credit provider) is deferred; or
(ii) one person (a debtor) incurs a deferred debt to another person (a credit provider)”
- Central to this question was the meaning of “debt” within the meaning of sub-reg 2B(3)(a):
- Bit Trade argued that Margin Extension did not involve a “debt” as (a) the Terms of Service did not create any customer obligation to pay money; (b) even if the Terms of Service did involve a customer obligation to pay money, that obligation may or may not arise; and (c) Margin Extensions were ‘notional transactions’ in that there were never any actual advance of funds.[17]
- ASIC argued that Margin Extension did involve a “debt” as (a) debt was not limited to an obligation to pay money, but meant a liability or obligation to pay or render something; and (b) therefore, debt could encompass an advance of cryptocurrency coupled with an obligation to return an equivalent amount and type. [18]
- In determining this question, whilst Justice Nicholas was not prepared to find that a debt might consist of something other than a monetary obligation, his Honour was prepared to find that a monetary obligation could include foreign currency. It was therefore necessary to scrutinise the Terms of Service closely to ascertain the content of the customer’s obligations and whether or not those terms required the customer to pay a sum of money.
- Justice Nicholas ultimately found that the relevant meaning of “debt” – being a conditional but unavoidable obligation to pay a sum of money at a future time – was satisfied by the Terms of Service which obliged a customer who was required to terminate a US dollar Margin Extension to pay the US dollar amount to Bit Trade.[19]
Civil Penalty
The Bit Trade decision concerned liability only. ASIC has indicated that it will seek injunctive relief and a pecuniary penalty,[20] while Bit Trade has indicated that it will rely upon the safety net in section 1317S(2) of the Corporations Act for honest contraventions to resist an order for payment of a pecuniary penalty.[21] The question of penalty and costs has been set down for hearing on
14 November 2024.[22]
[1] Under existing law, ASIC regulates crypto assets and businesses to the extent they involve financial products or financial services.
[2]See: https://treasury.gov.au/sites/default/files/2023-10/c2023-427004-fs.pdf. If legislation is passed, Treasury has proposed a 12-month transition period to allow industry participants to obtain a licence.
[3] [2024] FCA 457 (BPS Financial).
[4] [2024] FCA 953 (Bit Trade).
[5] See ASIC & Ors v NGS Crypto Pty Ltd (ACN 624 825 065) & Ors (QUD178/2024) before Justice Collier.
It is also worth noting ASIC’s recent unsuccessful claim against Finder Wallet Pty Ltd for allegedly carrying on a financial services business without holding an AFSL, by offering a debenture without a disclosure document or a target market declaration. Justice Markovic found that ASIC had failed on the “critical issue” of whether the Finder Earn product was a debenture, since (i) there were no moneys deposited or lent to Finder Wallet; and (ii) there was no undertaking by Finder Wallet to repay any moneys as a debt: ASIC v Finder Wallet Pty Ltd [2024] FCA 228.
[6] BPS Financial at [107]-[112].
[7] BPS Financial at [24] to [25], [69], [94] to [95], [205].
[8] BPS Financial at [205].
[9] BPS Financial at [8], [76].
[10] BPS Financial at [313] to [317].
[11] BPS Financial at [340] to [347].
[12] BPS Financial at [395] to [397].
[13] BPS Financial at [398] to [406].
[14] See ASIC’s Notice of Appeal here: https://download.asic.gov.au/media/bfrf5uli/24-090mr-notice-of-appeal-asic-v-bps-financial-pty-ltd-sealed.pdf
[15] Bit Trade at [7] to [10].
[16] Bit Trade accepted that Margin Extension was a formal of financial accommodation within the meaning of subreg 2B(3)(b)(i) of the ASIC Regulations.
[17] Bit Trade at [28] to [30].
[18] Bit Trade at [31] to [33].
[19] Bit Trade at [41] to [47].
[20] The maximum civil penalty for companies is the greater of: 50,000 penalty units (currently $15.65 million), three times the benefit obtained and detriment avoided, or 10% of annual turnover, capped at 2.5 million penalty units (currently $782.5 million).
[21] This approach follows the decision in ASIC v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578, where the Court relieved Block Earner from pecuniary penalties with respect to contraventions of the Corporations Act with respect to its ‘Earner Product’.
[22] Bit Trade at [4].
[23] See for example the Corporations Act, the ASIC Act, the National Credit Consumer Protection Act, and the Anti-Money Laundering and Counter-Terrorism Financing Act.
[24] See ASIC’s Information Sheet 225: Crypto-assets (INFO 225).
