Federal Court decision in Australian Securities and Investment Commission
On February 9th, 2024, the Federal Court of Australia made a key decision in the case Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd [2024] FCA 64.
This case, referred to as a test case, was about crucial matters regarding how financial services laws apply to products and services related to cryptocurrency.
The Court ruled that Web3 Ventures Pty Ltd (Block Earner) had violated the Corporations Act by offering a fixed yield product without having the required Australian Financial Services Licence (AFSL).
However, the court rejected claims from the Australian Securities and Investments Commission (ASIC) regarding a different product related to decentralised financial access.
You can read the complete judgement here.
This decision is part of a series of legal actions brought by the Australian Securities and Investments Commission (ASIC) over the past few years.
General Case Overview
Block Earner runs an online platform through its website, providing various cryptocurrency related products and services.
The case revolved around two products offered by Block Earner
- Earner Product: A product where users could lend their cryptocurrency to Block Earner and, in return, receive a fixed rate of return over the loan’s duration. Typically, Block Earner converts the customer’s AUD into the cryptocurrency chosen by the customer. At the loan’s end, the customer was entitled to an AUD amount calculated based on the cryptocurrency’s price plus a predetermined fixed rate of return.
- Access Product: This product allowed users access to the Aave and Compound, prominent Decentralised Finance (DeFi) protocols. Through this platform, users could lend their cryptocurrency holdings to borrowers and earn interest. The platform utilised algebraic models to adjust interest rates based on the principles of supply and demand in the lending market.
ASIC argued that both products qualify as “financial products” under the Corporations Act 2001.
ASIC claimed that Block Earner violated the law by engaging in a financial services business without the necessary Australian Financial Services Licence.
Court’s Verdict
The court found that:
- The Earner product was a managed investment scheme and a tool for making financial investments. This meant that Block Earner operated an unregistered managed investment scheme and conducted a financial services business without obtaining an Australian Financial Services Licence.
- The Access product did not fall under the category of financial products, as ASIC alleged.
Key Takeaways
This case serves as a crucial reminder that certain cryptocurrency-related products and services may be subject to Australian financial services regulations, even if cryptocurrencies themselves aren’t always treated as financial products. Applying these regulations can be challenging in many cases.
ASIC is consistently examining the regulatory boundaries for businesses involved in cryptocurrencies. Companies operating in this sector should thoroughly assess whether their activities fall under existing regulations.
The case also emphasises that, besides the formal terms and conditions, businesses should carefully review other materials provided to customers, such as language used in promotional material. These materials can impact the legal nature of the relationship between the business and the customer.
