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Federal Court applies financial services law to crypto-based financial products

Varied cryptocurrencies

The recent case of Australian Securities and Investments Commission (ASIC) v Web3 Ventures Pty Ltd [2024] FCA 64 sheds light on the regulatory landscape surrounding crypto-backed financial products. ASIC alleged that Web3 Ventures, trading as Block Earner, had engaged in conduct that required an Australian Financial Services (AFS) license by offering “Access” and “Earner” crypto-backed products.

The Earner product enabled users to lend cryptocurrency to Block Earner for fixed daily interest payments. These loans were lent to third parties to generate higher interest rates to recoup income for Block Earner. Block Earner also featured an Access product. This differs from Earner by generating a variable yield. ASIC alleged that these products contravened ss 911A and 601ED of the Corporations Act 2001 (Cth).

The Court held that that the Earner product contravened the Corporations Act by operating as a managed investment scheme and noted the requirement of an AFS licence. However, the Court held that whilst the Earner product was a managed investment scheme, the Access product was not, as users had the flexibility and discretion of when they would enter and exit the access scheme. It was also not an investment scheme as it needed that element of a broker connecting users to smart contracts as the Earner product.

In response to ASIC’s allegations, Block Earner entered into an enforceable undertaking, agreeing to cease promoting its services and providing financial advice without the necessary license. Pecuniary penalties are still being determined.

This judgment serves as a reminder that even though cryptocurrency remains under-regulated, financial offerings that involve crypto assets may be considered financial products under current legislative frameworks and must operate in accordance with those frameworks.

For a full reading of the paper, see here.

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