The Federal Court of Australia has released its decision in ASIC v Web3 Ventures Pty Ltd [2024] FCA 64 (Block Earner), the first significant decision regarding the application of financial services law to crypto-related products in Australia. See the full judgment here.
The decision is part of a series of lawsuits initiated by Australian Securities and Investments Commission (ASIC) in recent years, aiming to establish that existing financial services laws apply to crypto-related products similarly to their application to other financial services businesses.
Who should read this? Why?
While the Block Earner decision is an Australian judgment, it is relevant for cryptocurrency market participants in New Zealand. The decision addresses important issues related to the application of financial services laws to cryptocurrencies (we refer to these as digital assets in this article) related products and services. Given New Zealand courts have not yet considered a similar application and considering the close proximity between financial services law in Australia and New Zealand, the Block Earner decision provides useful guidance on how the law could be applied in New Zealand should the Financial Markets Authority (FMA) takes similar enforcement action.
Background
Block Earner operates an online platform through its website, offering various crypto-related products and services to its customers. The case turned on two products offered by Block Earner:
- “Earner” (which had been discontinued) where Block Earner used digital assets of customers to generate income for itself by lending the digital assets to third parties. Under that arrangement, Block Earner was required to pay the fixed interest rate to customers regardless of the amount of income it earned (if any) in relation to the digital assets.
- “Access” where Block Earner facilitates customers’ access to the Aave and Compound Decentralised Finance (DeFi) lending protocols.
ASIC contends that both products are “financial products” under the Corporations Act 2001, and therefore, Block Earner has contravened the law by conducting a financial services business without holding the appropriate Australian Financial Services License.
What are the findings?
Earner
The Court held that the Earner product met the definition of a “managed investment scheme” (defined relevantly as a scheme that has the following features):
- members contribute money or money’s worth as consideration to acquire rights (interests) to benefits produced by the scheme;
- any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or benefits consisting of rights or interest in property, for the members who hold interests in the scheme;
- the members do not have day-to-day control over the operation of the scheme.
In reaching that decision, the Court found that:
- consistent with previous decisions, loans with fixed interest returns can fall within the definition of “managed investment scheme” and that the right to interest and repayment of principal can be a right to “benefits produced by the scheme”;
- it was sufficient that the purpose of pooling was to enable Block Earner to generate returns for its customers – although the terms of use and the website contained contradictory statements regarding the nature of the pooling.
We note that the definition of “managed investment scheme” there is similar (albeit with some minor differences and exceptions) under the New Zealand Financial Markets Conduct Act 2013. See FMA’s Guidance on Cryptoassets which provides high-level guidance as to how a product should be treated under New Zealand laws.
Access
In summary, Block Earner aggregates the DeFi-specific digital assets of all customers, holding them in its omnibus account on each protocol. In essence, Block Earner does nothing with the digital assets other than deposit them into a smart wallet connected to the applicable DeFi protocols on instructions from the customers. The amount of yield earned is determined by the relevant DeFi protocol, and Block Earner does not retain any earned yield. Block Earner’s role was considered similar to that of a broker – effecting transactions on behalf of the customers who were using their digital assets to generate returns for themselves.
In considering whether Access gave rise to a managed investment scheme, the Court was not satisfied that there was “pooling” of money or money’s worth. This was, in summary, because digital assets were contributed on an individual basis, and there was no link between the contributions pooled and the production of financial benefits generated.
Other issues
The Court acknowledged the ongoing legal controversy as to whether cryptocurrency is a property at common law. However, the Court did not take a position on this matter (but noted that there could be potential challenges in applying the current financial services regulatory framework to the Earner product if cryptocurrency is not a property).
In New Zealand, the High Court decision in Ruscoe v Cryptopia Limited (in liquidation) CIV-2019-409-000544 [2020] NZHC 728 determined that digital assets are a form of intangible personal property, meeting the definition of “property” outlined in section 2 of the Companies Act 1993 (and also probably more generally). Notably, the Cryptopia case which provides arguably the most direct legal analysis of the legal nature of digital assets as property in the common law, was not referenced in the Block Earner judgment.
Our view
This landmark decision provides clarity as to the regulatory treatment of digital asset related products and services in Australia.
For New Zealand market participants, the decision serves as a timely reminder that the existing financial services regime might be applicable to digital asset-related products and services even if the digital assets themselves have not been treated as financial products. It remains to be seen if the FMA will express interest in testing the regulatory boundaries in this area, especially considering ASIC’s recent success. Until such time the New Zealand government establishes a clear regulatory framework for digital assets and related services, New Zealand market participants should carefully consider whether their products/services are subject to existing regulatory regimes. Market participants should also carefully review marketing materials (as seen in the Block Earner decision, the service description used in these materials can affect the regulatory treatment of your products and services).
If you have any questions concerning this or other matters related to the digital asset sector, please do not hesitate to contact one of our experts.
This article was co-authored by Ken Ng, Associate (Malaysian qualified), from our Banking and Financial Services team.
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