DDO case note: ASIC v Bit Trade

The judgment in ASIC v Bit Trade Pty Ltd [2024] FCA 953 was handed down on 23 August 2024.

What was this case about?

This case was not about how the DDO provisions applied, but about whether the DDO regime applied at all to the product offered by Bit Trade, which was called a Margin Extension.

DDO covers a “financial product” as defined for the DDO provisions. This includes financial products as normally defined in the Corporations Act and financial products as defined in the Australian Securities and Investments Commission Act (the ASIC Act).

The ASIC Act definition of a financial product includes a credit facility. However, regulations made under the Corporations Act exclude credit facilities when they do not involve deferring a debt or incurring a deferred debt.

The issue was whether the Margin Extension product fell within this exclusion.

The Margin Extension product

The Margin Extension product issued by Bit Trade enabled users to get “extensions” of legal tender such as Australian and foreign currency and digital assets such as bitcoin to make spot trades on the Kraken exchange. Bit Trade had not issued a TMD for the Margin Extension product, arguing that it did not fall within the scope of DDO.

Margin Extension customers had to hold an agreed minimum amount of legal tender or digital assets in their account as security for the margin extensions. If the amount fell below the minimum, assets purchased with the margin extension could be sold and the proceeds applied to terminating the margin extension. To terminate the Margin Extension, a customer had to transfer the same asset type that was provided with the Margin Extension. For example, if the Margin Extension was for $US, customer had to repay in $US.

The Margin Extension product was similar to traditional margin lending arrangement, except that it allowed for extensions to be made (and security provided) in the form of digital assets (as well as legal tender).

Did the Margin Extension product involve a debt?

Bit Trade argued that the Margin Extension product did not incur a debt because the word “debt” is limited to an obligation to pay money in Australian currency.

The Court held that the provision of a Margin Extension in national currency (including AUD and foreign currency) gave rise to a deferred debt which was incurred by the customer when the customer was provided with a Margin Extension and which became payable upon the customer ceasing to be eligible to receive the Margin Extension.

However, the Court found that a Margin Extension in the form of digital assets did not give rise to a deferred debt, because a digital asset is not money, and a debt involves an obligation to repay money.

Because Bit Trade had issued its Margin Extension product to retail clients without first making a TMD, Bit Trade contravened the DDO requirements.

Key takeaway

The key takeaway from the Bit Trade case is to make sure that when you are a product issuer, you have a complete and correct list of all DDO regulated products in your portfolio, to ensure that you are complying with DDO for all of these products.

If you are dealing in digital assets (aka crypto assets), it’s especially important to understand how these more exotic products fit into the financial services regulatory framework.  If you need advice on whether your product is regulated, contact us for a confidential discussion.