Untangling the crypto regulatory framework
The closing date of the Australian Government’s consultation process regarding the making of an initial coin offering (ICO) provides us with an opportunity to take a breath and review the current regulatory state of the crypto world, in preparation for the regulations that may be on the horizon.
Late last year, ASIC emphasised in a media release that businesses wishing to conduct an ICO will still be subject to general public offering legal obligations.
The media release provided a not-so-surprising reminder of these obligations, which include ensuring that there are no misleading or deceptive statements in sales or marketing material; and, where necessary, holding an Australian Financial Services licence (AFSL).
Guidance as to the appropriate advertisement of financial products can be found here; and otherwise in the Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)).
However, whilst many cryptocurrencies such as bitcoin are being treated as assets for taxation purposes (see our previous article here) rather than financial products, the business models we are seeing in this space require a multi-faceted analysis of the entirety of the business in order to ascertain whether the token offered is a financial product or the model falls foul of other laws.
Generally speaking, when a business is seeking to conduct an ICO, the token offered will fall into either of two main categories:
security tokens; and
utility tokens.
Security tokens are representative of a right to a benefit or ownership right in exchange for money whereby the value of the token is attached to an asset. However, utility tokens operate as a token that allows access to a protocol, such as the ether token on the Ethereum network. They can be thought of as a right to access a product or service.
Therefore, it is imperative that ICO providers look towards the substance of what the token actually represents and the rights accordingly conferred.
If the token amounts to a security token, an AFSL may be required as the token will fall within the definition of a financial product and the purchase of that token by retail investors will constitute a ‘financial investment’.
However, if the token amounts to a utility token, it will not be bound by the Corporations Act regime thus will not require an AFSL to sell or distribute.
Although bitcoin and many other cryptocurrencies are not financial products, the tokenisation of some assets may amount to a security and/or a managed investment scheme for the purposes of the Corporations Act if the token derives its value from an external, tradable asset. On this basis, an AFSL would be required to sell or distribute the token.
Additionally, ASIC have also provided that:
a mere statement that the token is a utility token does not, itself, prevent the token from being considered as such;
the features and rights associated with the token must be considered;
purchase into an ICO may amount to the purchase of shares, derivatives or non-cash payment facilities under the Corporations Act; and
crowd funding using an ICO is not the same as crowd-sourced funding pursuant to the Corporations Act.
For more information on the crypto regulatory framework or for general business and commercial advice, please contact:
Paul Gray
Principal Lawyer
T: 03 5225 5231
E: pgray@ha.legal
or
Alexander Gulli
Lawyer
T: 03 5226 8573
E: agulli@ha.legal