Crypto-Linked Products and AFSL Requirements: Key Takeaways from the Recent Court Decision

The Full Federal Court has overturned a previous decision that found Block Earner’s fixed-yield “Earner” product to be a financial product requiring an Australian financial services licence (AFSL).

This recent decision highlights the difficulty in applying the existing law to cutting edge crypto-linked products and confirms that when determining whether a crypto-linked offering amounts to a financial product, a careful case-by-case review of the legal structure of the product against the requirements of the Corporations Act is required.

Background

Web3 Ventures Pty Ltd, trading as Block Earner (the Company), is an AUSTRAC-registered digital asset provider. In 2022, it offered a fixed-yield product linked to crypto-assets (referred to here as the Earner product), and, Access, a variable-yield product not relevant to the proceedings. The Earner product allowed customers to “loan” specified cryptocurrency at a fixed interest rate, which the Company would then provide to third parties to generate income.

ASIC first brought proceedings against the Company for offering financial products without an AFSL. The initial decision by the Federal Court held that the Earner product was a financial product and that the Company had contravened the Corporations Act as a result.

Nevertheless, the Court chose not to impose a pecuniary penalty on account of a range of reasons, including that the Company had acted in good faith and that no Earner product customer had suffered any loss or damage. ASIC appealed the decision not to impose a penalty which the Company cross-appealed, arguing that the initial judgment erred in finding that the Earner product was a financial product.

Key Findings on Appeal

On appeal, the Full Court considered again whether the Earner product constituted a financial product, including in particular an interest in a managed investment scheme, a financial investment facility or a derivative.

• Managed Investment Scheme: On appeal, the Court held that because customers were only entitled to a fixed rate of return and not entitled to any benefits earned by the Company arising from the pooled investments or business activity of the Company, the Earner product was not a managed investment scheme. The fixed return was a matter of a standalone contractual obligation, rather than the result of a common enterprise entered into on behalf of customers.
• Financial Investment Facility: Similarly, in respect of the product being a facility through which a person makes a financial investment, the Court found that the further on-lending of crypto-currencies by the Company was done for the Company’s benefit, and it had no obligation to pass on any profits generated to holders of the Earner product.
• Derivative: Finally, the judges concluded that the exchange service (which enabled customers to receive their earnings in AUD) did not form part of the Earner product and was a separate discrete service that users were not required to use. As such, the product itself did not amount to a derivative.

🚦ASIC was ordered to pay costs of the proceedings, including the appeal, and have now sought special leave from the High Court to appeal the Full Federal Court decision. We will continue to monitor any further actions. The full case judgment can be read here.

💡A key takeaway for any company considering launching a crypto-linked product is to consider involving financial services experts early in the process, so as to ensure that the product is structured in a manner consistent with the existing regulatory environment. Please reach out to our expert team for further guidance.

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