ASIC is building its crypto-asset credentials, having commenced its first court action in relation to a crypto offering by filing proceedings against BPS Financial Pty Ltd (BPS) on 25 October 2022.

ASIC alleges that BPS made false, misleading or deceptive representations and engaged in unlicensed conduct in relation to a non-cash payment (NCP) facility involving a crypto-asset token, Qoin (Qoin Facility).

ASIC alleges that BPS contravened the Australian Securities and Investments Commission Act 2001 (Cth) by making false or misleading representations that:

1. consumers could be confident that they could exchange Qoin for fiat currency or other crypto-assets through independent exchanges;
2. consumers could use Qoin to purchase goods and services from an increasing number of merchants;
3. the digital wallet associated with the Qoin Facility was a product which is regulated, registered, and approved in Australia; and
4. the Qoin Facility and BPS were fully compliant with Australian financial services laws.

ASIC also alleges that, through offering the Qoin Facility, BPS engaged in unlicensed conduct.

What’s next for cryptocurrency regulation in Australia?

The regulation of crypto-assets and decentralised finance (DeFi) is a key part of ASIC’s 2022-26 Corporate Plan and ASIC has stated that it is willing to take enforcement action to protect consumers from harm associated with crypto-assets in ASIC’s remit. In a recent media release, ASIC describes crypto-assets as ‘highly volatile, inherently risky, and complex’ and in its corporate plan, states that it intends to raise public awareness of the risks inherent in crypto-assets and DeFi.

ASIC has indicated publicly on a number of occasions that it is particularly concerned about the potential risks that crypto-assets pose to vulnerable consumers. ASIC is concerned by crypto-assets that ‘mimic’ traditional products, but which seek to, in their view, circumvent regulation.

The BPS proceeding is the start of what is likely to be a raft of enforcement actions commenced by ASIC as part of its heightened focus on crypto-assets and its stated objective to protect consumers.

While no court dates have been set, BPS have indicated that they will be defending the claim. In that regard, it will be of particular interest ASIC’s arguments regarding whether the combination of tokens, a digital wallet on blockchain and the corresponding movement of crypto-assets between wallets on and off a platform constitutes an NCP facility. The outcome of those arguments could have wide reaching implications for the industry. It is not clear yet whether ASIC will be required to argue that certain crypto-assets themselves are financial products but this too would be significant in the context of the Federal Government’s proposed token mapping exercise.

Regardless of the outcome, the BPS proceeding is a clear message to the industry that ASIC is closely monitoring, investigating and taking action in relation to the disclosures by participants in the market, and participants should consider the overall features of crypto-asset based arrangements or crypto-asset adjacent services against the existing financial services regulatory framework.

What should other providers do?

Given ASIC’s view that crypto-assets are inherently risky and its corporate plan focuses on enforcement in this sector, it is likely that the regulator will be more interventionalist in the way in which products and services are disclosed to consumers, and will be working to ensure that crypto-asset service providers have appropriately considered and disclosed their product features and risks to consumers. As well as seeking advice on the regulatory status of any arrangements in place, providers should also prioritise ensuring their collateral and communication to consumers accurately reflects the services or products being provided.

For regulated providers (eg, operators of funds investing in crypto-assets), it is clear that ASIC expects a thorough and detailed consideration of the features and risks of any regulated products, including an examination of the nature of crypto-assets. For example, the speculative and risky nature of crypto-assets may mean that regulated products are not suited to a wide target market given the value of such an investment may drop to nil.

Providers should be aware that there are significant penalties for engaging in unlicensed conduct and/or misleading and deceptive conduct. As well as financial penalties, providers can also be subject to banning orders, reputational damage and customers exercising recission rights under the Corporations Act 2001 (Cth).

Please contact our Payments, Fintech + Blockchain and Disputes + Investigations if you wish to discuss.