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, Justice Ian Jackman ruled 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
However, Jackman 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,” Block Earner stated on Feb. 9.
“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.
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 terminated the Earner product 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.”
Aaron Lane, a senior research fellow at the Royal Melbourne Institute of Technology’s Blockchain Innovation Hub, believes the Australian Treasury’s proposed legislation for the crypto sector is likely to impose licensing conditions on Block Earner, should it be passed.
ASIC will now seek orders from the court imposing monetary penalties. The proceedings have been listed for a case management hearing at 9.30 am on March 1, 2024.
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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 before offering them, ASIC stressed.
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