ASIC ramps up crypto enforcement

In a recent speech, ASIC Chair Joe Longo described how crypto or digital assets are becoming a strategic priority for ASIC, given the large amount of money flowing into these products and the potential for consumer harm.

ASIC’s view is that crypto assets are “highly volatile, inherently risky, and complex” and it is concerned that investors do not fully understand what they’re investing in, or the very significant risks. Longo cited research showing that – bizarrely and unlike ASIC – as many as 80% of crypto investors don’t even consider crypto to be risky.

According to Longo, ASIC’s crypto regulatory strategy has three core elements:

• Developing an effective regulatory framework and greater regulatory clarity for crypto products. A big problem for enforcing laws in the crypto space is that the regulatory status of the products is unclear. They are not necessarily “financial products” within the current meaning of that term in the Corporations Act (although in some cases they certainly are).

• Enforcement action to disrupt and deter harmful products within ASIC’s jurisdiction. ASIC says that this includes “those that mimic traditional products or seek to circumvent regulation.” ASIC is conducting targeted surveillance action to identify and disrupt poor conduct in relation to high-risk and complex products such as crypto.

• Collaboration and cooperation with domestic and international peers. This is important because the crypto ecosystem “does not observe borders or the jurisdiction of any single Australian regulator.”

Two recent actions by ASIC show how ASIC is ramping up enforcement action in relation to crypto assets when they fall within its regulatory ambit.

Holon

On 17 October 2022, ASIC announced that it had made interim stop orders preventing Holon Investments Australia Limited (“Holon”) from offering or distributing three of its funds (“Funds”) to retail investors because of non-compliant target market determinations (“TMDs”). The Funds are the Holon Bitcoin Fund, the Holon Ethereum Fund, and the Holon Filecoin Fund. Each of the Funds is invested in an individual crypto-asset: Bitcoin, Ether and Filecoin respectively. The interim orders stop Holon from issuing interests in the Funds, giving a product disclosure statement for the Funds, or providing general advice to retail clients recommending investments in the Funds.

While Bitcoin, Ether and Filecoin may not themselves be financial products, the interests in a managed investment scheme such as the Funds which invest in those assets certainly are financial products, and so the Funds are regulated by ASIC.

ASIC is alleging that Holon has not appropriately considered the features and risks of the Funds in determining their target markets. The TMDs for the Funds suggest that the Funds are suitable for investors with a potential risk and return profile ranging from medium to very high and who intend to use the Funds as a satellite component (up to 25%) of their investment portfolio or even as a solution/standalone component (75-100%) of their investment portfolio.

ASIC’s power to issue stop orders in this situation is part of the product design and distribution obligations (“DDO”) which commenced in October 2021. One element of DDO which is becoming increasingly important as an enforcement tool is the appropriateness test for TMDs: the TMD must be such that it would be reasonable to conclude that, if the product were to be issued, or sold to a to a retail client in the target market, it would likely be consistent with the likely objectives, financial situation and needs of the retail client. In other words, the product must be appropriate for the target market. If ASIC considers that a product is not appropriate for consumers in the target market, it can stop those consumers from being able to buy the product, using a stop order to take the product off the market. ASIC used the same power recently to stop the marketing of other investment funds – see our article here.

Qoin

On 25 October 2022, ASIC announced that it had commenced civil penalty proceedings in the Federal Court against BPS Financial Pty Ltd (“BPS”) in relation to the Qoin crypto asset token (the “Qoin Facility”).

Qoin is marketed as a digital currency, with participating merchants accepting Qoin as payment for goods and services. Qoin can also be traded on Block Trade Exchange Limited (“BTX”). 

ASIC alleges that BPS made false, misleading or deceptive representations about Qoin.

More seriously perhaps, ASIC is also alleging that BPS has been carrying on a financial services business without an Australian financial services licence (“AFSL”), because the Qoin Facility is a “non-cash payment facility”, a type of financial product that falls under the AFSL regime. In its media release, ASIC says that the elements of the non-cash payment facility include Qoin tokens, the Qoin wallet, and a distributed digital ledger implemented by blockchain technology.

BPS is actually an authorised representative of an AFSL holder, Billzy Pty Ltd (“Billzy”), appointed on 1 September 2021. Billzy’s AFSL authorises it to deal and advise in relation to non-cash payment products, so it’s not clear at this stage why ASIC is saying that BPS was carrying on an unlicensed financial services business. ASIC has uploaded the originating process for the legal proceedings which outlines its claim, but this does not give the arguments in support of them. However we noted that the originating process claims that BPS has been carrying on an unlicensed business since January 2020, which is well before BPS became an authorised representative of Billzy in September 2021.  

The false, misleading or deceptive representations by BPS are alleged to include:

• consumers who bought Qoin tokens can be confident that they will be able to exchange them for other crypto-assets or fiat currency through independent exchanges (ASIC notes that increasingly restrictive limits were imposed on exchanging Qoin tokens for Australian dollars on BTX over time);

• Qoin tokens can be used to purchase goods and services from an increasing number of merchants registered with BPS;

• the Qoin Facility and/or the Qoin wallet application used to transact Qoin tokens are regulated, registered and/or approved in Australia; and

• the Qoin Facility and/or BPS are compliant with financial services laws.

It will be interesting to see the details of ASIC’s claim in this case and to watch how it progresses. Hopefully there will be a decision which clarifies how the currently regulatory framework applies to crypto.

Crypto providers with products similar to Qoin will need to understand whether their products are also at risk.

Patrick Dwyer and Kathleen Harris
Legal Directors