In our previous article titled ASIC's determination to regulate Crypto Currency and Crypto Asset Investments, we emphasised ASIC's continuing regulatory focus on issuers of crypto-assets and crypto-related investment products, intermediary services for crypto-assets and crypto-asset exchanges and trading platforms, and the problematic nature of applying the definitional framework under the existing Financial Services Regime which was not originally constructed to necessarily contend with such assets, investments, or related products and services.

In examining the decision in ASIC v Finder Wallet, we highlighted the potential limitations in the application of the statutory definition of debenture to the Finder Earn product, which, in essence, was a fixed return investment product which involved the conversion of money (AUD) deposited with Finder Wallet (a digital asset and trading service) into TrueAUD (a stablecoin cryptocurrency based on AUD) with a subsequent conversion back to AUD for repayment of the investment plus a fixed return at end of the term.

In that case the Federal Court held that the 'product' was not a debenture however ASIC is seeking to have the primary judgment set aside and has restated its claim that Finder Wallet offered a financial product to retail investors (being a 'debenture') without appropriate authorisation under an Australian Financial Services Licence.

Another recent case of the Federal Court in Australian Securities and Investments Commission v Bit Trade Pty Ltd [2024] FCA 953 reflects the continuing resolve of ASIC to regulate the crypto sector, which in this particular instance expanded the scope of regulatory capture for a crypto-related product in the context of credit regulation.

Bit Trade operated the digital cryptocurrency exchange 'Kraken', through which it offered a margin trading facility to Australian customers (Product) for the purchase of cryptocurrency on the digital exchange. Bit Trade described the Product as a ‘margin extension’ under which a customer could receive an extension of credit of up to five times the value of the customer's assets / collateral in their Kraken account.

ASIC brought proceedings against Bit Trade asserting that the Product was a 'financial product' for the purposes of the design and distribution obligations regime (DDO Regime) under Part 7.8A of the Corporations Act and as a consequence Bit Trade failed to comply with the DDO Regime by not issuing a target market determination to customers prior to distribution of the Product.

The principal regulatory question arising in the case was whether the Product is a 'financial product' in the form of a 'credit facility' in respect of which Bit Trade was required by s 994B(1) and (2) of the Corporations Act to issue a target market determination.

Notably, the definition of 'financial product' that is applicable for the purposes of the DDO Regime is the broader definition prescribed in the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act), which is different from the definition of 'financial product' in Part 7.1 of the Corporations Act relating to the general licensing and disclosure obligations. It was accepted by both parties that the Product was not a 'financial product' under Part 7.1.

In considering the definition of 'credit facility' under regulation 2B of the Australian Securities and Investments Commission Regulations (ASIC Regulations), the Court dealt with the following principal issues:

• whether a debt is incurred through use of a financial product; 

• whether an obligation to pay cryptocurrency is a monetary obligation in the nature of a debt;

• whether a conditional obligation to pay margin extension amount in national currency is a monetary obligation in the nature of a debt.

Bit Trade provided services, including access to a digital asset exchange (Kraken Exchange) through which its Australian customers can purchase and sell certain digital assets (including crypto assets  / cryptocurrencies),

The Product offered through the Kraken platform was described as margin services, enabling customers to receive extensions of margin through a dedicated margin account set up in the name of the Customer on the platform. 

Bit Trade provided services to Australian customers pursuant to the Terms of Service (TOS), available on its Website.

Under the TOS, the extension could be in the form of cryptocurrency or fiat currency used to make spot transactions (purchases and sales of digital assets / cryptocurrency) on the Kraken exchange. To maintain their margin extensions, customers were required to hold a specified minimum amount of collateral in their Kraken Accounts, consisting of either fiat currency (legal tender) or digital assets.

Customers were required to keep in their Kraken Account, at all times when a margin had been extended, a specified minimum amount of legal tender or digital assets as collateral. 

If the collateral level fell below the required minimum, the customer agreed that:

• assets purchased with the margin extension could be sold and the proceeds could be applied towards terminating the margin extension, and 

• any other assets within the customer’s Kraken Account could be liquidated, as necessary to terminate the margin extension or to restore the value of the collateral assets to an amount equal to the minimum margin requirement.

A customer could elect to maintain open positions on margin for an unlimited duration provided they continued to have sufficient collateral in their Kraken Account to support the extended margin.

Margin Extensions may comprise or include any Legal Tender (as defined) or Digital Assets (as defined) including bitcoin. 

The assets used to terminate a margin extension had to be the same asset type as the denomination of the margin extension. For example, if a customer was extended a margin denominated in bitcoin, they had to transfer bitcoin to terminate the margin extension.

Customers could be offered leverage and a customer could receive an extension of a margin of up to five times the value of the collateral in their Kraken Account, though the amount of leverage offered through a margin extension depended on the asset to be purchased.

Bit Trade's defence relied on ASIC Regulation 7.8A.20(9)(c)(ii), which provides that a target market determination is not required for credit facilities which do not involve credit described in sub-regulation 2B(3). 

Under Regulation 2B(3) credit means a contract, arrangement or understanding under which:

(i) payment of a debt owed by one person (a debtor) to another person (a credit provider) is deferred; or

(ii) one person (a debtor) incurs a deferred debt to another person.

That is, Bit Trade submitted that:

• a customer who is provided a Margin Extension does not incur a debt because the word “debt” in regulation 2B(3) is limited to an obligation to pay money;

• a customer who receives a Margin Extension in cryptocurrency may be required to return to Bit Trade an equivalent amount of the same cryptocurrency, and since cryptocurrency is not money, it cannot constitute a debt for the purposes of reg 2B(3).

• an obligation that is a debt must require payment in Australian dollars, and an obligation to pay an amount in a foreign currency such as US dollars does not create a debt within the meaning of that term as used in reg 2B(3). 

• there was no obligation to close a position that utilised the Margin Extension feature in the nature of a debt. Bit Trade contended that this was not merely a matter of uncertainty as to the time for payment, but rather, uncertainty as to whether any payment obligation exists at all.

Bit Trade accepted that the Margin Extension product is a form of financial accommodation within the meaning of the ASIC Regulations.

In response ASIC submitted that 

• “debt” within the meaning of reg 2B(3)(a) was not limited to a monetary obligation. 

•  an advance of cryptocurrency coupled with an obligation to return an equivalent amount and type can also constitute a debt for the purpose of that regulation. 

•  the word “debt” is not a word of “precise and inflexible denotation.

• the meaning of debt as the word is used in reg 2B(3)(a) is not limited to an obligation to pay money. ASIC did not submit that cryptocurrency is money, that is, it maintained that a debt is a liability or obligation to pay or render 'something' (which could include cryptocurrency).

The Court in its decision acknowledged that:

• there is longstanding authority holding that “a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation ”: Webb v Stenton (1883) 11 QBD 518 at 527 per Lindley LJ.

• an obligation to pay an amount of cryptocurrency of some type is not an obligation to pay a sum of money and therefore cannot be a debt.

• the reference to debt in reg 2B(3)(a) will include monetary obligations payable in foreign currency, which is particularly consistent with the law of bankruptcy where a statutory demand may be made for an amount payable in a foreign currency.

Based on the TOS, the Court held that the Product is a credit facility which involves credit of a kind referred to in reg 2B(3)(a) of the ASIC Regulations for the following reasons:

• a Margin Extension may be provided in Australian or foreign currency which amounted to  the provision of “financial accommodation” to the customer.

• it does not necessarily follow that the provision of financial accommodation in Australian or US dollars, gives rise to a debt. 

• if Bit Trade is contractually obliged to accept cryptocurrency in satisfaction of that obligation, then it is difficult to see how that obligation would amount to a monetary obligation capable of constituting a debt because it would not require the payment of a sum of money.

• to terminate the Margin Extension, the customer is required to transfer sufficient Funds from their Kraken account to Bit Trade and such Funds transferred must be of same asset type that was provided by way of Margin Extension, that is, to terminate a US dollar Margin Extension, the customer must pay the US dollar amount to Bit Trade which amounts to “a conditional but unavoidable obligation to pay a sum of money at a future time”

• the provision of a Margin Extension in national currency (including in Australian or US dollars) gives rise to a “deferred debt” which is incurred by the customer when they are provided with the Margin Extension and which becomes payable upon the customer ceasing to be eligible to receive the Margin Extension. 

Overall, the Federal Court decided that because the Margin Extension could be provided in national currency including USD or Australian Dollars, it may gave rise to an obligation to pay a sum of money at a future time which constitutes a debt. On that basis, the Court held that the Margin Extension product was a 'credit facility' that was not exempt from the DDO Regime and Bit Trade contravened the DDO Regime by failing to issue a target market determination to customers before the Product was distributed. 

This decision has broader implications for crypto businesses, both locally and internationally, that offer services in connection with crypto-assets involving fiat currencies, and on the scope of financial products captured under the DDO Regime by application of a broader definition of financial product (in this case credit and credit facility) under the ASIC Act.

It also reflects ASIC's continuing resolve to adapt the existing financial regulatory landscape to regulate crypto related products and services, in this case by characterising the Product as a credit facility for the purposes of the ASIC Regulations, and similarly the Court's approach in applying existing financial services laws to the crypto industry. 

Despite the current position that cryptocurrency itself is generally not a regulated financial product,  issuers of crypto-assets and crypto-related investment products, intermediary services for crypto-assets and crypto-asset exchanges, and crypto-asset trading platforms need to be mindful of the scope of services and products which may be captured by the existing financial services regulatory framework under the Corporations Act and ASIC Act. Please contact our Banking & Financial Services team if you require any advice in relation to the application of the Financial Services Regime to digital-assets or services offered in connection with such assets