An Australian federal court has seemingly formed a “nuanced” distinction over crypto-yield products— ruling that while products that promise a managed yield will require a financial services license, “pass-through” decentralized-finance (DeFi) products may not.
In a Feb. 9 order, federal judge Darren Jackson judged that Block Earner would be subject to penalties over the offering of its “Earner” product in 2022 — which offered yield for loans denominated in USD Coin (USDC), Bitcoin (BTC), Ether (ETH) and PAX Gold (PAXG), explaining that it needed to obtain an Australian Financial Services License.
However, Judge Jackson refrained from lumping Block Earner’s DeFi “Access” product into the same boat, explaining that it didn’t operate under a managed investment scheme and, therefore, no AFSL was required.
"The Court's decision carries nuanced implications for Block Earner and the broader crypto industry in Australia," said Block Earner in a Feb. 9 statement.
"The decision provides guidance to the industry as to the applicability of Australian financial services laws to crypto-related products and services."
The Federal Court finds fintech company Block Earner engaged in unlicensed financial services conduct when offering its crypto-backed Earner product https://t.co/TS7Xf8emuf pic.twitter.com/XOrxvZsEft
— ASIC Media (@asicmedia) February 9, 2024
The case was brought by the Australian Securities and Investment Commission (ASIC), which claimed both Block Earner’s Access and Earner product violated corporation laws.
In an interview with Cointelegraph, Piper Alderman digital asset lawyer Michael Bacina explained that Access was merely a pass-through to decentralized finance (DeFi).
“The Earner product involved a representation that user’s crypto would be used to make a return (but users would only be paid a fixed interest amount),” said Bacina. Meanwhile, the Access product doesn't rely on Block Earner making a return at all and is “completely dependent on Aave or Compound," he added.
Unpacking insights from the Block Earner v. ASIC Judgment. This hotly awaited decision can highlight danger areas on yield products, but also where products involving DeFi might be outside the regulatory perimeter.https://t.co/xVbPDB9EEs
— Michael Bacina | exgratia.eth | ⚖️ (@MikeBacina) February 9, 2024
The most important detail to scrutinize lies in how these products are marketed, Bacina stressed.
“The takeaway for Australian crypto businesses is how important it is that marketing and representations clearly align and that the features of products are very carefully considered.”
The Earner product operated from March 17, 2022, to Nov. 16 of the same year.
Block Earner confirmed to Cointelegraph that it ceased the Earner before proceedings commenced and that the findings do not affect any of Block Earner’s current products.
In a statement, Block Earner said the dismissal of ASIC’s case against Access "is an important development in showing how DeFi can coexist with Australia’s regulatory frameworks, paving the way for further development and adoption of DeFi solutions."
Senior Research Fellow Dr. Aaron Lane of RMIT’s Blockchain Innovation Hub believes the Treasury’s proposed legislation for the crypto sector is likely to impose licensing conditions on Block Earner, should it be passed.
Breaking from the Federal Court of Australia: Block Earner's "Access" products all fine, Crypto "Earner" products require AFSL and are a managed investment scheme. ASIC v Web3 Ventures Pty Ltd [2024] FCA 64 #cryptolaw #cryptonews https://t.co/yo9NTnPCfm
— Aaron Lane (@AMLane_au) February 9, 2024
ASIC will now seek orders from the Court imposing pecuniary penalties. The proceedings have been listed for a case management hearing at 9.30 am on March 1, 2024.
Related: Australian financial regulator sues eToro over ‘volatile’ trading products
ASIC said the decision was a step forward in protecting consumers from digital asset products.
“ASIC remains concerned that consumers do not fully appreciate the risks associated with products involving crypto-assets and today's decision is an important step forward to ensuring there are appropriate protections for consumers.”
The securities regulator called on firms offering cryptocurrency products to “carefully consider” whether their offerings constitute financial products under the existing regime.
If products do fall under the definition of a managed investment scheme, firms should seek licensing prior to offering them, ASIC stressed.
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