The High Court of Australia recently found 7:0 that a cryptocurrency-related fixed interest product offered by Web3 Ventures (Block Earner) was a financial product which required its issuer Block Earner to hold an Australian Financial Services Licence. The decision has important implications not only for those offering cryptocurrency-related products but also for anyone offering interest-earning or yield-earning products.
Emma Beechey appeared led by the Acting Solicitor-General of the Commonwealth Tim Begbie KC and Jeremy Giles SC for ASIC as the appellant.
Block Earner offered users a fixed yield on Australian dollar deposits made through its online platform. Users deposited AUD with Block Earner, then nominated an amount to be invested. Block Earner then converted the AUD to cryptocurrency and “borrowed” the cryptocurrency from the user (offering a 4% yield for Bitcoin, ether or PAX Gold and a 7% yield for USDC). Block Earner used the cryptocurrency to generate a return for itself and for its users by on lending the cryptocurrency to third parties at higher interest rates. When a user wished to withdraw their funds, Block Earner transferred the cryptocurrency to the user, plus the yield earned, and converted the cryptocurrency back to AUD.
At first instance, Jackman J held that the Earner Product was a facility through which a person made a financial investment, such that it was a financial product under s 763A(1)(a) of the Corporations Act 2001 (Cth). Block Earner had therefore contravened s 911A by issuing the product without an AFSL. The Full Court of the Federal Court unanimously allowed Block Earner’s appeal, holding that the product was not a facility through which a person made a financial investment because Block Earner only paid a fixed rate of return to the user and it on-lent the cryptocurrency for its own benefit.
The High Court unanimously reversed the Full Court’s decision. The High Court found that the Earner Product was a facility through which a person made a financial investment. The user contributed AUD to Block Earner and Block Earner used that contribution to generate a financial return for the user, namely the fixed yield. The Court rejected Block Earner’s submission that there must be a direct nexus or “skin in the game” between the user’s contribution and the particular enterprise in which the funds were deployed, noting that such a construction would be contrary to the text, structure and purpose of Chapter 7 of the Corporations Act.
Indeed, the High Court noted that regular bank deposit accounts are facilities through which a person makes a financial investment because banks use their depositors’ funds to generate the interest paid to depositors.
The Court also held that the Earner Product was a derivative within the meaning of s 761D because the amount of AUD a user was entitled to receive back at the end of the term was derived from or varied by reference to the exchange rate between AUD and the relevant cryptocurrency. Despite its description in Block Earner’s terms as a “loan” of cryptocurrency, the High Court found that Block Earner’s argument that it was a credit facility and therefore not a derivative failed because a facility by which a person makes a financial investment is carved out from the definition of a credit facility.
The High Court’s reasoning has significance beyond crypto-related products. It confirms that any arrangement under which a company offers customers a fixed interest rate or fixed yield may be a regulated investment facility, requiring the issuer to hold an AFSL. That will have ramifications far beyond the cryptocurrency sphere for all interest-earning products.
The judgment can be found here.
The High Court’s summary of the judgment can be found here.
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