Crypto Law in Australia

Digital assets and cryptos

Research indicates that over one million Australians own crypto.  Cryptos are generally regarded as high-risk investments. After shares, cryptos are the second most common type of asset held in Australia

What we mean by Crypto Law is not a specific area of law or specific legislation that regulates everything about the ownership, use and transactions of cryptocurrencies (cryptos) or digital assets.

We mean those existing laws that impact on the ownership, use, sale, purchase, exchange, custody and transfer of cryptos and digital assets.

Digital assets or cryptos as they are sometimes called are treated in Australia as a form of property.

It is not illegal to own and self-custody cryptos, or to use cryptos as a form of payment if you can find a trader or seller who is prepared to accept payment for a good or service in the form of crypto currencies. There has not been a high demand to use cryptos for payments.

Since 2017, crypto exchanges have benefitted from the legal status of regulated exchanges that can provide for the legal purchase, sale or swap of cryptos, provided that these crypto exchanges register with Australian Transaction Reports and Analysis Centre (AUSTRAC) and comply with anti-money laundering (AML) and counter terrorism financing (CTF) obligations.

Until recently, the Australian government has adopted a regulatory lite approach to crypto regulation although there is a trend now towards more effective regulation as a result, in part, of the series of setbacks to consumers from events over the last two years such as the FTX debacle and the collapse of Luna coin.

Fortunately, Australia has avoided the problems that have occurred in the United States of America from the lack of clarity caused by the enforcement heavy actions of the Securities Exchange Commission (SEC) which has adopted an aggressive regulation by enforcement approach to the burgeoning crypto market, and the SEC’s failure to engage in rulemaking that would assist market participants in the USA determine whether and in what circumstances a digital asset is a security.

Despite a less aggressive approach by the Australian Securities and Investment Commission (ASIC), the Australian regulator has adopted in recent times a more assertive enforcement approach to participants in the crypto market. (see recent cases).

Regulation of Crypto

Although digital assets are not the subject of a specific area of law in Australia, conduct in relation to digital assets can be caught by exist existing regulatory frameworks in Australia. Cryptos are already regulated in part by ASIC, the Australian Taxation Office (ATO) and AUSTRAC.

For example, investments in new crypto currencies to raise funds from the public may attract the operation of Australia’s financial services regulatory regime and crypto-related products may fall within the definition of a financial product under the Corporations Act 2001 or the Australian Securities and Investment Commission Act 2021.

Digital asset exchanges, often called centralised exchanges or CEXs must register with AUSTRAC and comply with Australia’s AML and CTF regulatory framework.

ASIC guidance

Unlike its American counterpart, the SEC, which regulates securities, ASIC has provided information for product issuers and market operators in helpful guidelines on how they can meet their regulatory obligations in respect of exchange traded products (ETPs) and other investment products.

The information is set out in Information Sheet 225 Crypto-assets (INFO 225) and Information Sheet 230 Exchange traded products: Admission guidelines (INFO 230).

The information is meant to provide good practices for market operators in how they admit and supervise these products, and good practices for product issuers in how they establish and operate these products. Key matters covered by these information sheets include the important issues of custody and disclosure (See INFO 225 https://asic.gov.au/regulatory-resources/digital-transformation/crypto-assets/ and INFO 230 https://asic.gov.au/regulatory-resources/markets/market-supervision/exchange-traded-products-admission-guidelines/ ).

INFO 225 shows the view of the ASIC when an initial coin offering (ICO) is intended to fund a company (or to fund an undertaking that looks like a company) then the rights attached to the crypto asset issued by the ICO may fall within the definition of a security.

It is the rights that attach to the tokens that may be critical. ASIC’s view is that if the rights attached to the crypto-asset are similar to rights commonly attached to a share, such as ownership rights in the issuer, voting rights in decisions of the issuer or some right to participate in profits of the body, then it is likely the crypto-asset will be treated as a share. Most investors familiar with crypto will recognise that most crypto assets do not give such rights to holders even if they acquire through an ICO.

INFO 230 recognises that licensed exchanges may determine that crypto assets can be permissible underlying assets for ETPs admitted to their market. INFO 230 recognises that some cryptos may not be financial products while other cryptos may be financial products.

Given the unique characteristics and risks of crypto-assets, we expect market operators to carefully assess, on an individual basis, whether it is appropriate for a particular crypto-asset to be a permissible underlying asset for ETPs admitted to their market. In conducting this assessment for crypto assets that are not financial products

Despite giving guidance to the market there remains considerable market uncertainty in the absence of comprehensive legislation that provides a regulatory framework for key digital asset activities such as custody of digital assets.

ASIS has also published guidance in the information statement on INFO 219 “Evaluating distributed ledger technology”.

Financial Products and lending activities

Cryptos that form part of an investment product may be a financial product under the Corporations Act 2001 which will cause them to fall within the financial services regulatory regime. For an example, an investment product involving cryptos may be a managed investment scheme, which is a financial product (see our comments on ASIC -v- Web3 Ventures Pty Ltd).

A product that involves crypto may also be a derivative.

Recent ASIC enforcement action has targeted crypto related products as being managed investment schemes or derivatives.

Further crypto currency lending activities may fall within the scope of credit activities and services pursuant to the National Credit Consumer Protection Act 2009 (see recent cases for an example).

The developing crypto regulatory Framework in Australia

After El Salvador recognised Bitcoin as legal tender in 2021, the Australian Government took prompt steps to clarify that Australian crypto assets are not subject to foreign currency tax arrangements.

The Treasury Laws Amendment (2022 Measures no. 4) Act amended A New Tax System (Goods and Services Tax) Act 1999 to exclude crypto assets such as Bitcoin from being treated as a foreign currency for Australian income tax purposes.

Tax Issues

Transactions involving crypto assets are subject to the same tax rules as other assets. There are no special tax rules for crypto assets.

The basic tax treatment is that:

1. For tax purposes, crypto assets are not a form of money but are capital gains tax (CGT) assets;
2. If cryptos are used as a payment method, the usual GST rules apply to the payment or receipt of digital currency for commodities or services.
3. Rewards for staking crypto are ordinary income for tax purposes.

Current reforms

On 22 August 2022, the Commonwealth Government announced token mapping would be the first stage in a multistage reform agenda that aims to develop an appropriate regulatory framework for the crypto industry.

A consultation process has commenced in Australia towards the enactment of legislation to regulate the crypto industry. The first consultation paper dealt with token mapping of cryptos and was entitled Token Mapping Consultation Paper. This consultation paper was released in February 2023.

The consultation process is being managed by the Australian Treasury. The token mapping step sought to ascertain how existing financial services regulation applies to the crypto industry.

By 3 March 2023, the closing date for submissions, ninety-one non-confidential submissions were received by the Treasury, including a submission by Morgan Mac Lawyers.

The second stage of the public consultation process focused on licensing digital asset platforms. A proposal paper entitled Regulating Digital Asset Platforms was released by the Australian Treasury in October 2023 (view it here: https://treasury.gov.au/sites/default/files/2023-10/c2023-427004-proposal-paper-finalised.pdf)

This focus on licensing digital asset platforms represents the fact that one in four Australians own some crypto, and digital asset platforms now hold digital assets on behalf of consumers valued at billions of dollars. Another reason for the focus on licensing digital asset platforms is the collapse of digital asset platforms in Australia and overseas.

Further regulation of digital asset platforms has three goals:

1. Introducing a framework that fosters innovation and growth;
2. Providing the industry with certainty and clarity;
3. Protecting consumers and their assets.

Pursuant to the proposed regulation, the existing Australian financial services law will be leveraged to partly regulate crypto and digital asset platforms that hold cryptos above a certain threshold value (either per customer or aggregated) will need to obtain an Australian Financial Services Licence. This will require digital asset platforms to meet Australian financial services regime legal and licensing obligations.

In addition, digital asset platforms will need to meet additional specific obligations unique to the digital asset industry. The specific obligations to be uniquely imposed on the crypto industry will include:

• standard form platform contracts
• minimum standards for holding tokens
• standards for custody software
• standards when transacting in tokens

Further, certain digital asset activities will attract additional obligations including trading, staking, tokenisation and fundraising.

The risk of the proposal is over-regulation.  Crypto platforms face more regulation than non-crypto platforms.

The proposed regulatory approach focuses on digital asset service providers who hold consumer’s cryptos and not the tokens themselves.

Recent Court Decisions

Morgan Mac Lawyers keeps up to date and comments on recent important and relevant cases involving crypto.

Please see our case reviews on the following cases:

1. ASIC -v- Bit Trade Pty Ltd;
2. ASIC -v- Web3 Ventures Pty Ltd;
3. ASIC -v- BPS Financial Pty Ltd.
4. King River Digital Assets SPC v Salerno.

ASIC -v- Bit Trade Pty Ltd

In this proceeding, ASIC alleged that Bit Trade contravened the design and distribution requirements relating to products contained in part 7.8(A) of the Corporations Act 2001 (Cth) by offering credit to customers in spot trading of digital assets on the Kraken Exchange.

The credit was provided in the form of digital assets or legal tender and was called a margin extension. To obtain this credit, customers needed to exceed a minimum balance on their account at the time of accessing the credit and have sufficient collateral in their account to support the margin extension.

In the period from 9 January 2020 to 11 August 2023, 1,150 clients used the retail product of whom 968 of these clients suffered losses totalling AUD$12,951,083.40.

ASIC alleged that the margin extension was a credit facility on the grounds Bit Trade offered its customers credit for use in spot transactions of some crypto assets and was a financial product.

Once the credit was provided, Bit Trade customers were required to keep in their account a minimum amount of assets which was determined by Bit Trade as collateral.

Bit Trade was entitled to sell or liquidate the assets purchased with the credit if collateral levels fell below the required minimum.

Section 994B of the Corporations Act required Bit Trade to make a target market determination (TMD) and to make it available to the public before engaging in retail distribution of its credit product.

Bit Trade charged fees for providing the credit to its customers.

Bit Trade distributed (issued) and continued to distribute the financial product without making and publishing a TMD.

ASIC sought declarations and pecuniary penalties in relation to the alleged contravention and injunctions prohibiting ongoing distributions of the margin extension.

See the concise statement filed by ASIC. https://download.asic.gov.au/media/equhk4dw/23-256mr-concise-statement-asic-v-bit-trade.pdf

ASIC -v- Web3 Ventures Pty Ltd

On 23 November 2023, ASIC commenced proceedings in the Federal Court of Australia against Web3 Ventures Pty Ltd trading as block earner (Block Earner). Block Earner offered to consumers fixed yield earning products based on digital assets being USDC (a stable coin), PAXOS Gold, Bitcoin and Ethereum.

Block Earner also offered variable yield earning products to consumers. This table summarises the products Block Earner offered and the underlining digital asset or assets.

Facts

ASIC alleged that these products were financial products for the purpose of the Corporations Act 2001 (Cth), being one or more of the following:

1. A managed investment scheme;
2. An investment facility;
3. A derivative.

On 16 November 2022, Block Earner ceased offering the fixed yield earning products. At the time, Block Earner ceased offered the fixed yield products the annualised percentage yields offered to investors 7% for USD Earner and 4% for Gold Earner and Crypto Earner.

Block Earner on its website under FAQs, stated that Block Earner is able to generate returns by gathering customer funds and lending it to our trusted partners to receive a favourable yield rate. In response to other FAQs, Block Earner stated that:

1. When customers lend digital assets, they would begin earning daily compounded yield;
2. Block Earner took care of the heavy lifting by providing a user-friendly portal for earning high yields;

Block Earner Products involved a process in which a customer’s nominated Australian dollar amount was converted to the appropriate crypto asset through an overseas exchange platform (described as an exchange service), and the newly converted crypto assets were automatically loaned to Block Earner on an unsecured basis referred to as a lender service. Block Earner then lent those crypto assets on an unsecured basis to third parties from whom they received a fixed yield.

In respect of the Access Product, Block Earner converted consumers AUD deposits into nominated crypto assets through a centralised exchange service provider and transferred them to the AAVE or Compound DeFi protocols to earn yield.

ASIC argued that the Earner Product and the Access Product were managed investment schemes within the definition of section 9 of the Corporations Act. A managed investment scheme contains the following components:

1. There is a scheme;
2. Consumers contribute money or monies worth (e.g. digital assets) as consideration to acquire rights or benefits produced by a scheme;
3. Any of the contributions are to be pooled, or used in a common enterprise, to produce financial benefits, or rights or interests in property for those members who hold interests in the scheme;
4. The members in the scheme do not have day to day control over the operation of the scheme.

Earner Product and Access Product

ASIC contended that the Earner Product satisfied this test for a managed investment scheme because consumers gave money or digital assets to block earner (the contribution). Block Earner used the contributions to generate yield or an increase in the value of the crypto assets (the rights or benefits). Block Earner represented that the contributions of consumers were pooled to produce yields and consumers did not have day to day control over the operation of the scheme.

In the case of the Access Product, Block Earner’s terms provided that Block Earner aggregates the DeFi tokens in an omnibus account (pooling) and consumers have no day to day control over the operation of the scheme and/or the compound and AAVE DeFi protocols.

ASIC also alleged that the Earner Product and Access Product were investment facilities within the definition of section 763B of the Corporations Act because they had the following features:

1. Contribution of money or crypto assets by a consumer;
2. Use by Block Earner of consumer’s contributions to generate a financial return to the consumer or an intention by the consumer or Block Earner that it would use the contributions to gain a financial return for the consumer;
3. The consumer has no day to day control over the use of their contributions to generate the return.

Finally, ASIC contended the Earner Product and Access Products were derivatives because the amount of consideration measured in AUD varied by reference to the value of the crypto assets because:

1. In respect of the Earner Product, on exiting their accounts, consumers funds were converted from crypto assets to AUD at the relevant exchange rate between AUD and the crypto asset applied by Block Earner;
2. In respect of the Access Product because the yield paid to consumers by Block Earner varied by reference to the yield paid by DeFi protocol.

As the entity responsible for the obligations to consumers under the terms of the Earner Product and the Access Products, Block Earner was the issuer of these products under section 761E(4) of the Corporations Act. As these products were financial products, by issuing the products Block Earner was dealing in financial products pursuant to section 766C and providing a financial service pursuant to 766A of the Corporations Act. This meant that Block Earner required an Australian financial services licence (AFSL) in respect of the Earner Product and Access Products. It did not have an AFSL in contravention of section 911A of the Corporations Act.

Further, as the Earner Product and Access Product were managed investment schemes, they were required to be registered with ASIC. Block Earner failed to register these managed investment schemes with ASIC and operated managed investment schemes in contravention of section 601E,D(5) of the Corporations Act.

Outcome

Judgment was delivered by the Federal Court of Australia on 9 February 2024 in ASIC v Web3 Ventures Pty Ltd [2024] FCA 64.  The Court found that the Earner Products were financial products, and the Access Product was not a financial product.

The Court found that the Earner Product was a managed investment scheme because:

1. There was a scheme;
2. There was a contribution by consumers who were not acting alone and independently to achieve a return on their investment. The contribution was made by customers jointly with others to acquire a right to a benefit from the scheme, namely a fixed interest rate and repayment of the principal and interest. The return did not fluctuate based on the fortunes of Block Earner’s business or any income Block Earner earned from lending its customers’ crypto to third parties. However, it was significant that Block Earner represented that it could pay the benefit by lending the aggregated cryptocurrency of its customers at a higher interest rate offered in the Earner Products.
3. The contributions of investors were pooled, and this was represented on the Block Earner website. Further Block Eaner represented that the purpose of the pooling was to allow Block Earner to generate funds by lending to third parties in return for a favourable yield. The facts satisfied the implicit requirement in case law for this element of the test that the contributions must be objectively intended by consumers to produce financial benefits.
4. Consumers who used the Earner Product did not have day-to-day control over the operation of the Scheme.

The Court found that the Access Product was not a financial product and specifically, was not a managed investment scheme.

Interestingly, the court did find the Access Product was a scheme and did find that consumers who used the Access Product did not have day-to-day control over the operation of the Scheme but found that the other elements for the statutory test were not satisfied.

Firstly, on the basis that the term contribute conveys joint rather than independent action, the Court found that the individual holdings of consumers from their own perspective were treated on an individual basis, and they retained ownership of their DeFi tokens issued by Compound and AAVE, and even though the tokens were issued to Block Earner and held in its omnibus Compound or AAVE accounts. The Court found that consumers did not use the Access Product to furnish Block Earner with a common fund.

In terms of the element of pooling or contributions or a common fund, ASIC sought to rely on Block Earner’s use of an omnibus account on the AAVE and Compound protocols and submitted that it only needed to show that contributions were pooled and that there were financial benefits through the scheme to those who held interests in the scheme. ASIC  submitted it did not need to show a link between the pooling and the financial benefit other than that they were both elements in the scheme.

The Court rejected ASIC’s submission and found that there must be a link between pooling of contributions or their use in a common enterprise and the production of financial benefits. There was no evidence from which it could be inferred that users objectively intended that their payments would be pooled to produce financial benefits. ASIC failed to satisfy its onus to prove this element of a managed investment scheme.

The decision is likely to be persuasive as it is the first ASIC enforcement case of this nature involving crypto that has been contested that has so far resulted in a judgment.

The case shows the importance of obtaining compliance advice on whether crypto market participants are dealing with financial products or financial services. The fact crypto is involved does not mean the Australian financial services regulatory regime does not apply.

See the amended concise statement filed by ASIC:

https://download.asic.gov.au/media/snuhfrso/22-324mr-amended-concise-statement-published-4-april-2023.pdf

See the judgment: 24-019MR ASIC v Web3 Ventures – Judgment

ASIC V BPS Financial Pty Ltd

On 25 October 2022, ASIC commenced legal proceedings against BPS Financial Pty Ltd.

ASIC alleged that BPS Financial Pty Ltd (BPS) implemented a facility in relation to a crypto asset called Qoin (Qoin Facility).

According to ASIC, the Qoin Facility is a non-cash payment facility that was established by BPS in January 2020 and includes:

1. Qoin tokens;
2. A wallet;
3. A distributed digital ledger implemented by blockchain technology;
4. A means of acquiring Qoin tokens, including from BPS or an entity associated with BPS;
5. A means whereby business operators who hold Qoin Wallets can register as participating merchants (Qoin Merchants) in the Qoin Facility.

ASIC alleged that BPS promoted Qoin tokens to retail consumers and Qoin Merchants as a means of making payment for goods and services offered by Qoin Merchants.

The  Qoin Wallet allows the user to transact only in Qoin Tokens and a person cannot transact with Qoin without the Qoin wallet.

BPS promoted the Qoin Wallet by various statements as the only means of using Qoin Tokens to make payment for goods and services offered by Qoin Merchants for the purposes of the Qoin Facility.

Block Trade Exchange Pty Ltd (BTX), a related entity of BPS, has operated the BTX Exchange. Qoin Tokens can be acquired on the BTX Exchange.

By 24 October 2022, there were approximately 37,900 Qoin Merchants registered with BPS.

BPS operates a digital directory called ‘Q Shop’, on which Qoin Merchants and consumers who hold Qoin Wallets, advertise goods and services that can be purchased using Qoin Tokens.

The Qoin Wallet App includes a gateway to the Q Shop.

As time passed, limits were imposed restricting Qoin holders from exchanging Qoin tokens for Australian dollars on the BTX Exchange.

BPS has issued and maintained combined Financial Services Guides and Product Disclosure Statements by which BPS offered to issue or invited applications for a facility described in the Qoin Offer Documents and referred to as the ‘Payment System’ which according to ASIC was the Qoin Facility or the Qoin Wallet.

This payment system, which ASIC called the Qoin NCP Product is alleged by ASIC to be a facility through which a person makes non-cash payments; and) is therefore either:

• a ‘financial product’ for the purposes of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act) and Part 2 of the ASIC Act; (by Sections 763A(1)(c) and 763D of the Corporations Act and sections 12BAA(1)(c) and 12BAA(6) of the ASIC Act); and
• a ‘financial service’ for the purposes of Part 2 of the ASIC Act (Section 12BAB(1AA) of the ASIC Act).

From January 2020 until 30 September 2022, BPS has issued this financial product more than 93,000 times.

Interestingly, ASIC alleged that making the QOIN wallet available for use and requiring Qoin wallet users to agree to registration on terms agreed with QOIN and stipulated from time to time on its website was an issue of the Qoin NCP Product.

ASIC also referred to multiple representations and statements on the Qoin website or it the Qoin whitepaper that were intended or reasonably regarded as intended to influence persons to make a decision in relation to the Qoin NCP Product.  This amounted to BPS engaging in a financial services business without an Australian financial services licence in contravention of section 911A(5B) of the Corporations Act.

There is also an issue about several representations made by BPS which ASIC alleges were:

1. the making of false or misleading with respect to the Qoin NCP product in contravention of section 12DB(1) of the ASIC Act;
2. conduct that was misleading or deceptive or likely to mislead or deceive in contravention of section 12DA(1) of the ASIC Act.

The matter proceeded to a trial that took place from 16-19 October 2023 and judgment has been reserved and not yet been delivered.

See ASIC’s Amended Statement of Claim:  

https://download.asic.gov.au/media/nhydelw1/22-287mr-asic-v-bps-amended-soc-sealed-20230621.pdf

King River Digital Assets SPC v Salerno [2023] NSWSC 510

In King River the issue was whether an arbitration clause in a contract between a consumer and a digital asset trading business called TrigonX should stay legal proceedings against the director of TrigonX

Facts

The facts were that after signing the contract with TrigonX, King River was on-boarded in March 2022 as a customer of TrigonX.

From time to time, King River transferred crypto assets to TrigonX and purchased crypto assets from TrigonX. Further, King River transferred USD funds to TrigonX and sold crypto assets to TrigonX in exchange for USD funds.

By the time of the FTX ex-bankruptcy in November 2022, TrigonX held USD$20,400,000 of King River’s assets of which USD$9,500,000 had been transferred by TrigonX to FTX.

King River demanded the return of its funds held by TrigonX. Shortly after this demand, TrigonX was placed into administration.

King River commenced proceedings against the sole director of TrigonX, Mr Salerno, who was not a party to the contract between King River and TrigonX.

The claim against Mr Salerno was for damages pursuant to section 236 of the Australian Consumer Law for misleading and deceptive conduct in contravention of section 18 of the Australian Consumer Law.  King River stated that TrigonX represented that:

1. It had not exposed King River’s digital assets to third party exchange risk;
2. None of King River’s were held by FTX;
3. All of King River’s USD funds were held in various bank accounts.

The representations were untrue because some of King River’s assets and USD funds were held by FTX and because it was misled about this state of affairs King River lost the chance to have them returned before FTX became bankrupt.

King River alleged that Mr Salerno was an accessory to and involved in the misleading conduct of Salerno.

The issue was whether the court proceedings should be stayed, and the matter referred to arbitration pursuant to the relevant arbitration legislation, even though Mr Salerno was not a party to the contract containing the arbitration clause.

Arbitration clause

The resolution of this issue depended on whether the arbitration clause extended to Mr Salerno even though he was not a party to the contract between King River and TrigonX.  This in turn depended on whether the extended definition of “party” in the Commercial Arbitration Act, which applies to ‘any person claiming through or under a party to an arbitration Agreement’.

The Court noted that the meaning of this part of the definition extended to any person seeking to enforce a right or resist the enforcement of a right of a party to the arbitration agreement, This applies if an essential element or a cause of action or defence was vested in or exercisable by an arbitral party.

In this case, TrigonX was an arbitral party, and the defence of Mr Salerno turned on a ground of defence exercisable by TrigonX, namely that it did not make misleading representations and did not engage in misleading and deceptive conduct. 

The arbitration agreement did apply to the proceedings and the Court ordered that the proceedings be stayed.

The case is important in showing how arbitration clauses in agreements involving crypto can apply to third parties standing behind entities that are parties to the agreement and cause legal proceedings against those third parties to be stayed while an arbitration process continues.

See Judgment:

https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/510.html?context=1;query=crypto;mask_path=

Bill Morgan.

Consultant

BA, LLB, MA, MCIArb, PRI, NMAS FDRP