Digital assets businesses operating without an Australian financial service licence (or without being an authorised representative of a licensee) should be prepared to substantiate and justify why their digital asset(s) or related products or arrangements are not regulated financial products, in all aspects of their offering, says ASIC.
As foreshadowed in our paper,[1] ASIC has now released its draft update to Information Sheet 225 – “Digital Assets: Financial products and services” – for public consultation (Draft INFO 225).[2]
Draft INFO 225 looks to build upon the existing Information Sheet 225 (which considers ‘crypto-assets’ only) by examining whether ‘digital assets’ more broadly are likely or unlikely to be financial products, and if so, what kinds.
Highlights from Draft INFO 225 include:
- Even though a digital asset may not be a financial product itself, where the digital asset is bundled together with other products and services, the overall bundle or arrangement may be a financial product, with ASIC having a particular focus on how the product, bundle or arrangement is marketed.
- Draft INFO 225 provides various examples of scenarios where the digital asset (or the overall bundle or arrangement) may constitute a financial product. To summarise:
- If the digital asset allows customers to receive a financial return or benefit (e.g. by the digital asset increasing in value on an exchange, or by generating a cash flow), and the digital asset is marketed and intended to be used for those purposes, then the digital asset is likely to be a financial product and, in particular, a facility through which a person may make a financial investment.
- Alternatively, if a digital asset is not intended to be used as (and is not marketed as) a means through which customers generate a financial return or benefit, then the digital asset may not be a facility for making financial investments even though the value of the digital asset may increase or decrease over time. For example, NFTs which are used to denote ownership of in-game collectible items (e.g. character skins), and which are not marketed as a means through which players may generate a financial return or benefit (other than the utility of playing the game), are unlikely to be a facility for making financial investments even though the value of the NFTs may fluctuate on secondary exchanges due to player sentiment.
- An arrangement through which holders are issued digital assets with a value linked to underlying assets held in a trust for all holders may be a managed investment scheme if the arrangement generates financial benefits for the holders. If the arrangement generates a financial benefit for the business only (and not the holders of the digital assets) however, the arrangement may not be a managed investment scheme.
- Digital assets may resemble a security, e.g. if the rights attached to the digital assets include ownership and voting rights. Generally however, there needs to be a sufficient connection between the use of the initial funds raise in issuing a digital asset and the potential capital gains. For example, “meme coins” which do not entitle the holder to any rights and which are not connected with the success of the issuer or any other business, are unlikely to be a security or a financial product. On the other hand, corporate bonds which are tokenised on a blockchain, and which otherwise have the features of typical bonds, are likely to be a debenture and thus a financial product.
- Businesses offering products or services in connection with digital assets will therefore need to consider all the rights and benefits attached to: (1) the digital assets themselves, and (2) the arrangements provided in connection with the digital assets, including the way the products or services will be offered and used in practice. Consideration should also be given to how the rights and benefits of a digital asset are described in the ‘white paper’ or related marketing materials.
Interestingly, the consultation paper on Draft INFO 225 is also seeking feedback on ASIC’s approach to licensing digital asset businesses, including a class no-action position for digital assets businesses that are in the process of applying for or varying an Australian financial services (AFS) licence, Australian market licence or clearing and settlement facility licence. Any proposed no-action position would only apply to licencing breaches related to operations that commenced prior to the date of the consultation paper and will not cover lending/earn products and derivatives referencing digital assets (other than wrapped tokens) – given ASIC’s view that there is greater industry certainty around these products due to its prior enforcement action.
ASIC is also consulting on the introduction of two new AFS licence authorisations, including a new category of derivatives for products that do not involve leverage or margin requirements, and the additional information ASIC may require in relation to AFS licensing applications connected with digital asset businesses.
Public consultation on Draft INFO 225 closes on 28 February 2025, with the updated Information Sheet 225 expected to be released in the second quarter of 2025. ASIC says Information Sheet 225 will be a ‘living document’ which will be continually updated as regulatory and other developments emerge.