The difficulty of monitoring crypto assets

ASIC now has a 1:1 ratio when it comes to court success in the enforcement of crypto activities following actions against Finder and Block Earner.

Last week, ASIC lost a case in the Federal Court against comparison site Finder regarding whether Finder had provided unlicensed financial service with crypto product Finder Earn. ASIC argued this was a ‘debenture’, but Justice Brigitte Markovic disagreed.

Reacting to the win, Finder chair and co-founder Fred Schebesta said: “Innovation always moves faster than regulation, and this case is a great example. It highlights the need for more open communication between innovators and regulators, to navigate emerging sectors by ensuring a collaborative approach to both progress and compliance.”

The regulator had previously won a case in February 2024 against Block Earner, its first crypto enforcement action, where the court found Block Earner had operated an unregistered managed investment scheme and engaged in unlicensed financial services conduct when it offered its crypto-backed Earner product.

However, while it won the overall case, the court disagreed with ASIC’s allegation that Block Earner’s variable yield crypto-asset-based offering was a financial product.

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Liam Hennessy, partner at law firm Clyde & Co and specialist in financial services risk and compliance, said the victory for comparison site Finder should give the industry greater confidence. 

“It is the first time that the Australian courts have considered what a debenture actually legally ‘is’, together with the added complexity of the blockchain overlay,” Hennessy said.

“It gives greater confidence to the Australian industry and consumer market on the regulatory position (so is a win for ASIC in a broader ‘clarification’ sense), which is sorely needed as crypto is the second-highest financial product held by Australians after shares based on ASIC’s own research.”

Law firm Hall and Wilcox added: "[This judgement] suggests courts will examine the actual substance and mechanics of a crypto-based product, rather than just its appearance. Importantly, the Finder Wallet judgement offers guidance for digital currency exchanges on how to issue their earn products to avoid being classified as a debenture. 

"However, there’s still a risk of ASIC claiming that an earn product is a managed investment scheme, as seen in the Block Earner case."

While crypto assets are not one of the regulator’s 2024 enforcement priorities, it currently has at least two other civil penalty proceedings in place regarding crypto. One was announced in September against crypto exchange Bit Trade and a second in October against BPS Financial.

“Firms offering products with crypto assets must carefully consider whether their offerings are financial products under the existing regime. And, if they are, ensure that they are appropriately licensed and authorised before distributing them,” deputy chair Sarah Court said last year.

The difficulties posed with enforcing crypto activity has prompted Treasury to conduct a consultation into introducing a regulatory framework for the assets and Hennessy said its introduction will prompt ASIC to take more enforcement action in the space going forward.

The Regulating Digital Asset Platforms consultation seeks to introduce a regulatory framework to address consumer harms in the crypto ecosystem while supporting innovation.

The proposed regulatory framework would apply to digital asset platforms that present similar risks to entities that operate in the traditional financial system. It proposes to leverage the Australian financial services framework to regulate digital asset platforms to ensure consistent oversight and safeguards for consumers.