This article in our series examining the decision in Australian Securities and Investments Commissions v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet) explores ASIC's appeal of the primary judgment handed down in favour of Finder Wallet.

 ASIC has appealed the recent decision handed down by the Federal Court in ASIC v Finder Wallet which found that ASIC had failed to demonstrate that the Finder Earn product met the definition of 'debenture' under section 9 of the Corporations Act (meaning the product was not considered a financial product for the purposes of the Australian financial services regime).
 
Our previous article in this series sets out a detailed analysis of the operation and issue of the Finder Earn product and findings of the primary judge.
 
ASIC is seeking to have the primary judgment set aside and restates its claim that Finder Wallet contravened the financial services regime by offering a financial product to retail investors (being a 'debenture') without appropriate authorisation under an Australian Financial Services Licence.

 The appeal has been lodged on two grounds:

(Ground 1) - that the primary judge should have found that an investor's acquisition of the Finder Earn product was a 'deposit of money or a loan' to Finder Wallet in the nature of a debenture (on the basis of the same contentions ASIC submitted in the primary judgment); and
(Ground 2) - that the primary judge incorrectly found that there was no undertaking by Finder Wallet to repay moneys loaned or deposited with it as a debt because:

(a) ABN Amro Bank NV v Bathurst Regional Council (2014) (ABN Amro) wrongly held that the definition of 'debenture' imports a notion that moneys loaned or deposited with the company must be used as part of the company's working capital; or
(b) in the alternative, money deposited or lent to Finder Wallet by investors was used as working capital of Finder Wallet.

In our view, Ground 2 of the appeal is the more interesting submission since the primary judge did not substantively deal with or analyse Finder Wallet's use of TrueAUD once an investor had allocated it to Finder Wallet when acquiring or participating in the Finder Earn product.

Whilst this process was acknowledged, the primary judge instead placed an emphasis on the ultimate purpose of the product, stating that:

"…it is difficult to see how that deposit or loan was made to Finder Wallet as part of its working capital. While the Terms permitted Finder Wallet to use the TrueAUD transferred to it in any way it wished, the purpose of the Finder Earn product was…to promote the growth of use of the Finder App".

It remains to be seen whether ASIC's contention to configure the Finder Earn product within the statutory definition of 'debenture' will succeed. The appellate case will be heard by the full bench of the Federal Court on a date yet to be determined.

 In our view, ASIC's appeal is surprising in light of the primary judgment which strongly emphasised the limits of the definition of debenture as stated in ABN Amro and thus the Court was unreceptive of ASIC's contention. It is yet to be seen whether the Full Bench of the Federal Court will be similarly unreceptive to the suggestion that investor funds were used as working capital.
 
Currently, it can be assumed that many novel crypto investment products (similar to Finder Earn) operate in the 'grey area' of the financial services regime and are issued to retail consumers without appropriate supporting documentation such as a Product Disclosure Statement or Target Market Determination. Thus, from a regulatory policy and reputational perspective, ASIC's role as consumer protection watchdog for Australia's financial markets is driving its continuing efforts to address a perceived regulatory, licensing and disclosure gap.
 
Against this background, we also note that the Senate's Standing Economics References Committee into the investigation and enforcement activities of ASIC (dated July 2024), indicates that resourcing constraints are continuing to impact due to ASIC's remit being "one of the widest of any corporate regulator in the world" and which is severely limiting the matters that ASIC decides to pursue, "leading ASIC to focus only on what it considers the highest risk cases".
 
In this regard, based on its recent enforcement activity (including in the Finder Wallet case) it is apparent that ASIC considers novel 'grey-area' cryptocurrency investment products to be of substantial risk to consumers and that ASIC is utilising valuable resources to initiate appellate litigation in order to deliver results which favour its perception that additional risk protection is needed in this sector and is within ASIC's mandate.
 
Proposed reforms to the financial services regime to regulate digital currency exchange providers has progressed (albeit slowly) however regulation of cryptocurrency-based products and assets is still evolving.
 
In the absence of reform, ASIC must work with conventional of financial product which are not, from inception, purpose-built for a digital economy.
 
ASIC's appeal in Finder Wallet reflects its approach in other proceedings in relation to similar cryptocurrency investment products such as:

• ASIC's appeal of the Federal Court’s decision to relieve Block Earner from liability to pay a penalty for contraventions related to unlicensed financial services when it offered its crypto-related Earner product (Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578; and

• the judgment in favour of ASIC finding that BPS Financial Pty Ltd engaged in unlicensed conduct when offering the ‘Qoin Wallet’, a non-cash payment facility which used a crypto-asset token called ‘Qoin (Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457.

We will explore these specific cases and the path ahead for digital currency and digital asset regulation in our next and final article in this series.