Case note: when crypto product needs Australian financial services licence

The ALRC has recently observed that Australian financial product regulation is complex. The Federal Court of Australia has considered the regulation of a cryptocurrency-based product for the first time.

In Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 the Federal Court of Australia decided that Web3 Ventures Pty Ltd trading as Block Earner contravened s 911A(1) and (5B) of the Corporations Act 2001 (Cth) by carrying on a financial services business without holding an Australian financial services licence covering the provision of financial services with respect to the “Earner” product. It also contravened s 601ED (5) and (8) of the Corporations Act 2001 (Cth) by operating an unregistered managed investment scheme with respect to the “Earner” product.

Web3 Ventures is an AUSTRAC-registered digital currency exchange that allows users to exchange Australian dollars (AUD) into cryptocurrencies but it did not hold an Australian financial services licence.

Block Earner was an authorised representative of a licensee but its authorisation does not relate to the Earner Product.

While Justice Jackman found that the Earner product was a managed investment scheme (and was not registered and had more than 20 members), the Earner product was not a derivative.

Proceedings in relation to Block Earner’s “Access” product were dismissed. Justice Jackman decided that the users of the Access product did not make a financial investment, and that the Access product constitutes a contract for the future provision of services within the meaning of s 761D(3)(b), and is therefore excluded from being a derivative.

Block Earner also operates a digital currency exchange (Exchange Service), which is registered with the Australian Transaction Reports and Analysis Centre, that allows users to exchange Australian dollars (AUD) into cryptocurrencies. The Exchange Service allows users to buy and sell over 100 different crypto currencies using the Block Earner platform.

From March 2022 to November 2022, Block Earner offered consumers the Earner product which allowed them to earn fixed yield returns from different crypto-assets.

Justice Jackman concluded that the evidence about Earner was:

“consistent with the statement on the website that Block Earner was able to generate returns by pooling customer funds and lending them to third parties thereby receiving a favourable yield rate, in that the favourable yield obtained from those parties allowed for the payment of fixed interest to users as well as a profit margin for Block Earner itself. I have referred above to the statement on the Block Earner website from March to May 2022 to the effect that Block Earner was able to generate returns by pooling customer funds and lending it to third parties, thereby receiving a favourable yield rate…

The representation on the website did not refer to Block Earner contributing its own cryptocurrency, but the fact that it did so does not mean that users were not themselves making contributions jointly or to furnish a common fund. Users thus contributed money or money’s worth jointly with all other users, as consideration to acquire the right to the promised fixed interest yield under the Earner product which Block Earner represented it would be able to pay because of the benefit produced by the scheme of enabling Block Earner to earn revenue in a greater amount by deploying the pooled contributions from users (as well as its own cryptocurrency) in lending the aggregated cryptocurrency to third parties at a higher rate. Block Earner submitted that it was conceivable that Block Earner may have been able to put itself in funds to pay the fixed interest in some other way, but that was not what was represented to users.”

The judgment deals with questions of liability only. Questions of penalty are to be decided later.

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David Jacobson

Author: David Jacobson
Principal, Bright Corporate Law
About David Jacobson
The information contained in this article is not legal advice. It is not to be relied upon as a full statement of the law. You should seek professional advice for your specific needs and circumstances before acting or relying on any of the content.

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