Emma Beechey recently appeared led by Jeremy Giles SC in ASIC’s first two challenges to unlicensed cryptocurrency-related products in the Federal Court of Australia.
In the first decision, Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64, Jackman J found that the defendant (trading as Block Earner) had issued an unlicensed financial product without the required Australian Financial Services License. The product was a fixed-interest earning loan to Block Earner in which customers deposited AUD which was then converted into USDC (a stablecoin) or bitcoin, Ethereum or Paxos Gold and lent to Block Earner. The Court found that the product was a managed investment scheme because Block Earner represented to users that their contributions would be pooled and on-lent, allowing Block Earner to receive a favourable yield rate, and that the product was also a facility by which a person makes a financial investment for similar reasons. ASIC also submitted that the product was a derivative. Having found that it was a managed investment scheme, Jackman J did not determine whether it would otherwise have been a derivate as a managed investment schemes are carved out from the definition of derivative.
ASIC alleged that a second product, called Access, was also a financial product. Under the Access product, customers used their deposited AUD to purchase cryptocurrency that was then exchanged by Block Earner for DeFi tokens on the Aave or Compound DeFi protocols. Justice Jackman found that Access was not a managed investment scheme because the pooling of customers’ DeFi tokens did not produce financial benefit for the customer – the return to the customer would have been the same if they had invested directly in the DeFi protocols without any pooling. His Honour found that Access was not a facility by which a person makes a financial investment because Block Earner was in the position of a broker effecting transactions on behalf of its customers, rather than an investment manager (relying on a statutory note to the s 763B definition which states in effect that buying shares through a broker is not a facility through which a person makes a financial investment). Finally, his Honour found that Access was not a derivative because it was a contract for the provision of future services and was therefore excluded from being a derivative.
A separate hearing on penalty regarding the Earner product will be heard by Jackman J on 15 May 2024.
In the second decision, Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228, Markovic J found that a fixed-interest product offered by Finder Wallet was not a debenture because, although customers deposited AUD, the AUD was converted into TAUD (a stablecoin) and the Terms of Use provided that it was the TAUD that was lent to Finder Wallet, not the AUD. Accordingly, the loan was not a loan of “money” as required by the definition of debenture in the Corporations Act 2001 (Cth) and Finder Wallet was not required to repay the money as a debt.
Her Honour also found that the loans were not for the “working capital” of the business and so, applying ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1, [2014] FCAFC 65 at [676], that the product was not a debenture. Her Honour found that the loans were not for working capital because the CEO gave affidavit evidence that he conceived of the product as a novel way to promote the Finder App and as a way for customers to sell their cryptocurrency and earn a return. It would therefore seem that a company’s subjective intention is relevant to whether a product is a debenture, and that the CEO’s stated purposes was not a use of working capital.
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