Crypto-based product needs financial services licence, says Federal Court

Landmark ruling sets precedent for crypto-asset space

Crypto-based product needs financial services licence, says Federal Court



The Federal Court has ruled that the fintech firm Block Earner must possess a financial services licence to offer its cryptocurrency-backed product.

This landmark judgment marks one of the initial applications of financial services law to crypto-based products, with the court determining that Block Earner had been providing financial services without a licence and had operated an unregistered managed investment scheme.

Between March and November 2022, Block Earner made the crypto product Earner available to the public, promising fixed yield returns from various cryptocurrencies.

According to the court’s findings, the Earner product qualifies as both a managed investment scheme and a financial investment facility under current laws, necessitating a financial services licence for its operation.

Sarah Court (pictured above), deputy chair of the Australian Securities and Investments Commission (ASIC), commented on the significance of the ruling, highlighting its role in clarifying the regulatory status of crypto-backed products.

“This important decision provides some clarity as to when crypto-backed products should be considered financial products which require licencing under the law,” said Court. “Crypto assets are risky, inherently volatile and complex. 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.”

She further advised firms dealing with cryptocurrency-related products to thoroughly evaluate if their offerings qualify as financial products under existing regulations, ensuring they secure the necessary licences and authorisations before making them available to the public.

Court rules on another Block Earner product

The Federal Court also addressed ASIC’s allegations regarding another of Block Earner’s offerings, referred to in the proceedings as the Access Product.

Access Product has been marketed as a way to enable consumer access to decentralised finance (DeFi) lending protocols, which ASIC argued bore the hallmarks of a managed investment scheme, investment facility, or derivative. The court, however, did not agree with this assessment.

Block Earner is the trading name for Web3 Ventures Pty Ltd, an AUSTRAC-registered digital currency exchange.

Following the court’s ruling, ASIC will be seeking court orders for the imposition of monetary penalties on Block Earner. The case is scheduled for a management hearing on March 1, 2024.

The regulator has initiated several enforcement actions targeting unlicenced conduct and misleading practices within the crypto-asset space.

ASIC previously initiated civil penalty proceedings against BPS Financial Pty Ltd in 2022 for unlicenced activities and deceptive statements related to its Qoin crypto asset.

Later that same year, proceedings were commenced against Finder Wallet Pty Ltd for providing unlicenced financial services and failing to meet product disclosure and design and distribution obligations with its Finder Earn product.

More recently, ASIC came down on Bit Trade Pty Ltd, the provider of the Kraken crypto exchange in Australia, due to allegations of non-compliance with design and distribution obligations related to margin trading products offered on the exchange.

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