The Australian Securities & Investments Commission (ASIC) has updated its guidance about the regulatory regimes that may apply to initial coin offerings (ICOs), cryptocurrency and other crypto-assets.1
The updated information sheet, Initial coin offerings and crypto-assets (INFO 225), makes it clear that ASIC is continuing its scrutiny of ICO and crypto activity in Australia. In particular, ASIC’s guidance clarifies that:
- ASIC’s recent experience is that many businesses involved in crypto activities may be dealing in financial products. This means that, to avoid breaching the law, such businesses would normally need to be authorised under an Australian financial services licence (AFSL) and comply with the other requirements of the Australian financial services regulatory regime when conducting their activities.
- The prohibition on misleading or deceptive conduct will apply to all crypto businesses regardless of whether they are dealing in financial products.
- The Australian financial services regulatory regime regulates products, including crypto products, which are in substance financial products. In each case, the specific features of an ICO or other crypto activity will need to be looked at to determine whether the regime applies.
- The onus is on businesses to seek legal and professional advice to understand whether the Australian financial services regulatory regime applies to them. If a business takes the view that the regime does not apply, ASIC expects the business to be able to justify this view.
Substance over form
The enthusiasm for ICOs and crypto-assets worldwide has led to regulatory responses in many jurisdictions, including the United Kingdom, the United States and Singapore.2 The rapid development of the crypto market globally has also given rise to common terminology which industry participants and commentators use to categorise and make sense of the crypto landscape.
For example, in the context of ICOs, it is now standard to classify ICOs based on the kind of tokens they offer, such as “utility tokens” (which can be used to access some service, product or other function of the token issuer’s platform), “exchange tokens” (which can be used to receive certain benefits on cryptocurrency exchanges) and “reward tokens” (which may be issued to participants in a platform in reward for activities they undertake).
The danger for participants in crypto activities in Australia is assuming that these widely-used labels will determine the regulatory treatment of the relevant activities under Australian law. As ASIC’s guidance indicates, the Australian financial services framework is concerned with the substance of ICOs and crypto-assets, rather than merely their form. To determine whether a crypto activity falls within the remit of this framework, you need to consider the particular characteristics of the activity, including all associated rights and obligations. Further, these matters have to be considered in relation to the peculiarities of Australian law: the approaches regulators have taken overseas to a particular issue may not be relevant.
Is your ICO or crypto-asset a financial product?
ASIC’s guidance indicates that the key question that industry participants must consider is whether their crypto offerings are, or involve, financial products.
This question will be relevant to all participants in the crypto ecosystem, from coin/token issuers and their investors all the way through to coin miners, crypto exchange platforms, wallet providers and other intermediaries.
Given the nature of most crypto activities, the most relevant questions industry participants should ask themselves in this regard are:
- Is the ICO, crypto-asset or related activity a managed investment scheme?
This may be the case where the activity involves people contributing money or crypto-assets to obtain an interest in a venture which ‘pools’ contributions to produce financial benefits for all participants, and where the contributors do not have day-to-day control over the venture.
- Is it a security or an offer of a security (e.g. a share or option)?
A crypto-asset (such as a token) does not need to be called a “security” or a “share” for it to count as a security under Australian financial services law. If the crypto-asset gives holders rights which are similar to those that usually attach to shares in a company, such as ownership rights, voting rights or rights to participate in profits and distributions, then the crypto-asset might be a security.
- Is it a derivative or an offer of a derivative?
Broadly speaking, a derivative is a product or instrument that derives its value from something else, such as an underlying asset or asset price. While the most familiar examples of derivatives are widely known and traded instruments such as futures and swaps, the definition of a ‘derivative’ in Australian financial services law is broad and capable of capturing crypto-assets whose value is in some way linked to other assets or crypto-assets.
- Is it, or does it involve, a non-cash payment facility?
Some crypto-assets (such as coins and tokens) may be forms of value which can be used to make payments instead of using physical currency. Activities which involve such crypto-assets may be non-cash payment facilities if, for example, they allow for payments to be made to multiple payees.
As ASIC’s information sheet makes clear, if a crypto-asset or related activity falls into one or more of the above categories, then it is likely the issuer (and perhaps also related participants) will require an AFSL and will need to comply with the disclosure and other obligations of the Australian financial services regime (such as issuing a prospectus or Product Disclosure Statement to potential investors). Additionally, a platform which enables people to buy, be issued or sell crypto-assets falling into the above categories may be operating a financial market, requiring an Australian market licence.
Misleading and deceptive conduct in the crypto space
Whether or not your crypto activities involve financial products, ASIC has also reiterated that businesses will always be subject to the prohibition on engaging in misleading or deceptive conduct.
Businesses accordingly need to ensure that they are not led astray by the hype and excitement surrounding ICOs and crypto-assets and tempted to make statements in white papers, promotional material or other communications which may mislead or deceive. This also includes making sure you don’t use social media to falsely generate the appearance of a greater level of public interest in an ICO or crypto-asset than really exists.
We recommend that businesses implement the same vetting, verification and quality control procedures with their crypto offerings as they would with any other investment offering, such as an offer of shares or other securities.
The onus is on you (but we can help)
Finally, ASIC’s guidance places the onus squarely on businesses and industry participants to ensure that they undertake the necessary analysis on their activities to determine whether financial services laws apply to them, including by obtaining legal and other professional advice.
ASIC’s message to crypto businesses is clear: if your view is that Australian financial services law does not apply to your crypto activities, then you need to be prepared to justify that conclusion.
For more information or to discuss any particular crypto proposal or business, please contact us.
1. Australian Securities & Investments Commission, Initial coin offerings and crypto-assets (INFO 225) (30 May 2019), https://asic.gov.au/regulatory-resources/digital-transformation/initial-coin-offerings-and-crypto-assets/.
2 .For one recent example, see U.S. Securities and Exchange Commission, “Framework for ‘Investment Contract’ Analysis of Digital Assets” (3 April 2019), https://www.sec.gov/corpfin/framework-investment-contract-analysis-digital-assets.
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