ASIC launches first case testing crypto regulation powers

On Nov 17, 2022

On 25 October 2022, the Australian Securities and Investments Commission (ASIC) commenced civil penalty proceedings involving crypto-assets against BPS Financial Pty Ltd (BPS). ASIC alleges BPS made misleading or deceptive representations and engaged in unlicensed conduct in relation to crypto token Qoin. This is the first time ASIC has commenced civil penalty proceedings in the Federal Court of Australia involving crypto-assets and this will be the first case to test whether a crypto-asset will be regulated as a financial product.

These civil penalty proceedings have commenced as ASIC continues to move on crypto regulation. On 3 November 2022, ASIC released its enforcement priorities for 2023. For the first time, these priorities include preventing misconduct involving high risk products including crypto-assets. Speaking at ASIC’s Annual Forum 2022 the same day, ASIC Chair Joe Longo said of crypto-assets:

“They are highly volatile, inherently risky, and complex… You will be aware that work continues at the domestic level to formulate a regulatory response. In the meantime, ASIC continues to utilise the current laws and its expanded regulatory toolkit – including the design and distribution obligations regime, or DDO – to protect investors from harms arising from risky, volatile and complex products.”

The announcement of ASIC’s enforcement priorities builds on ASIC’s work in the crypto space over the last year. Earlier in October 2022, ASIC imposed interim stop orders on a crypto lender. In April 2022, ASIC commenced proceedings in the Melbourne Magistrates Court against a crypto lender for falsely claiming to have an Australian Credit Licence. And in October 2021, ASIC issued updated regulatory guidance setting out ASIC’s position on crypto regulation.

ASIC continues to grapple with the diverse nature of crypto-assets. However, it is apparent that the regulator continues to be concerned by what it has called the “real risk of harm to consumers and markets if [crypto] products are not developed and operated properly”. With that view, it is not surprising that ASIC has identified crypto-assets as a focus for 2023.

ASIC’s role regulating crypto

ASIC regulates financial markets, products and services. Whether any particular crypto-asset falls under ASIC’s regulatory remit has not yet been proven in an Australian Court. There remains uncertainty about the scope of ASIC’s role regulating crypto-assets but it is likely to take a broad view that asserts a role where it sees a need to protect consumers.

In October 2021, ASIC published ASIC Report 705 – Response to submissions on CP 343 Crypto-assets as underlying assets for ETPs and other investment products providing an update on key decisions ASIC has made in relation to the industry. ASIC also reissued updated versions of Information Sheet 225 – Crypto-assets and Information Sheet 230 – Exchange traded products: admission guidelines providing updated guidance for those operating in and around the industry.

ASIC’s case against BPS over its Qoin Facility

ASIC alleges that the Qoin Facility promoted by BPS is a non-cash payment facility, a type of financial product. The Qoin Facility comprises:

Qoin Tokens;
the Qoin Wallet;
and a blockchain ledger.

BPS promoted Qoin Tokens as available for exchange for goods and services with selected merchants and for exchange with fiat currency on the BTX Exchange. The BTX Exchange was operated by Block Trade Exchange Pty Ltd, a related entity of BPS.

ASIC alleges BPS made various misleading or deceptive representations:

that a person who purchased Qoin Tokens could be confident that, if and when they wanted to, they could exchange the Tokens for fiat currency or other crypto-assets on independent exchanges (ASIC alleges this could only occur on BTX Exchange);
that Qoin Tokens could be exchanged for goods and services at an increasing number of merchants (ASIC alleges the number of merchants was declining);
that the Qoin Wallet was a financial product regulated, registered and/or approved under Australian law (ASIC alleges it was not); and
that the Qoin Facility and / or BPS were fully compliant with Australian financial services law (ASIC alleges they were not).

The allegations made by ASIC reflect the claims made by group members in a class action commenced in the Federal Court against BPS in November 2021.

ASIC has asked the Federal Court to declare that BPS was conducting an unlicensed financial services business, impose pecuniary penalties on BPS, grant injunctions preventing BPS from carrying on a financial services business, and make orders requiring BPS to publish advertisements publicising its conduct.

Speaking about ASIC’s decision to commence the proceedings, ASIC Deputy Chair Sarah Court stated:

“Where it falls within our remit, ASIC will take targeted action against unlicensed conduct and misleading promotion of crypto-asset financial products that could harm consumers – this is a key priority for ASIC. Crypto-assets are highly volatile, inherently risky, and complex. Every crypto-asset is different, often making it difficult to compare with each other – or anything else. This makes it crucially important that investors are provided with honest and accurate information.”

Key takeaways for the crypto industry

There continues to be uncertainty regarding ASIC’s crypto regulation remit and this is unlikely to be clarified without legislative change. Some uncertainty regarding non-cash payment facilities may be resolved by judgments in the civil penalty proceeding and class action against BPS, but these cases will still leave many issues unresolved.

For 2023, ASIC is sending a clear signal that it will take a more interventionist approach to crypto regulation and intends to test the extent to which crypto-assets can be regulated within its existing powers. We expect to see further enforcement proceedings commenced and that ASIC will publish further or updated guidance on its approach to crypto regulation.

It is essential that crypto industry participants prepare, because:

regulation of financial products and financial services is complex and participants’ existing policies and procedures may need to be updated to ensure compliance. For example, the design and distribution obligations require issuers and distributors of financial products to design and review financial products by reference to consumer objectives, financial situation and needs;
ASIC has substantial regulatory and investigative powers, including the ability to compel the production of information and to require witnesses to attend compulsory examinations. ASIC can also issue stop orders and product intervention orders to stop financial products being distributed and/or placing conditions on those financial products being distributed. Participants may need to consider how they would respond to an enquiry or investigation from the regulator, or comply with such an order;
failing to comply with regulations enforced by ASIC may result in severe financial and other penalties; and
regulatory activity may prompt class actions or vice versa. That BPS faces both at the same time reflects a trend across other industries regulated by ASIC.