The next article in our series examining the decision in Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet) explores the contentions submitted by both ASIC and Finder Wallet as to whether the Finder Earn crypto-currency product falls within the definition of 'debenture' under the Corporations Act 2001 (Cth).

 In summary, Finder Wallet offered Finder Earn which was, in essence, a fixed interest crypto-currency investment product.
 
To invest in or use the Finder Earn product, customers were required to hold or otherwise create an account with Finder Wallet (Finder's cryptocurrency and exchange platform). Customers would then deposit Australian dollars into their Finder Wallet accounts and convert those funds (by electing to do so via a "Transfer and Convert" option), into an Australian dollar-denominated 'stablecoin' called TrueAUD (TAUD) which was subsequently allocated to Finder Wallet under their "Cryptocurrency Earn Option".
 
At the point of allocation, ownership of the TAUD passed to Finder Wallet for pooling with the allocations of other customers and Finder Wallet's own property. Importantly, this allocation and pooling meant that customers did not maintain a legal interest in the allocated TAUD and the allocation could be used by Finder Wallet without limitation however primarily to promote the growth and use of the Finder App.
 
In this regard, the customer's only right in relation to the allocation was a contractual right or promise by Finder Wallet that at the end of the investment term, the customer would receive back an amount of TAUD equal to the initial amount allocated plus a fixed return of 4.01% p.a. (Return). The amount of TAUD remitted would then be automatically converted to AUD such that the customer would receive AUD back into their account when they exited the Finder Earn product.
 
That is, the customer's only right in relation to the allocation during the Earn Term was a contractual right to receive back an amount of cryptocurrency equal to the allocation and any "Return" at the end of the Earn Term.

 ASIC submitted that the effect of the product terms was that the customer's acquisition of or investment in the Finder Earn product was akin to a deposit or loan arrangement as between a customer and bank, particularly given, in ASIC's view, that Finder Wallet undertook to repay moneys 'deposited' or 'loaned' as a debt (plus a fixed interest Return) and customers 'deposited' such moneys based on that promise.
 
ASIC contended that the deposit of AUD, the acquisition and allocation of TAUD, and the end Return to the customer formed part of one related transaction and that the Return to the customer was an obligation to repay a loan in AUD via the following steps:

• AUD initially 'deposited' by the customer and subsequently 'loaned' to Finder Wallet;

• repayment of the loan in AUD by way of the TAUD conversion;

• payment of an additional fixed interest Return.

Accordingly, ASIC submitted that the Finder Earn product fell within the general definition of "debenture" in section 9 of the Corporations Act, namely in that:

• money was deposited with or lent to the body (money deposited with or alternatively lent to Finder Wallet by the customer);

• there was a 'chose in action' (an undertaking by Finder Wallet to repay); and

• the chose in action included an undertaking by the body to repay as a debt the money deposited or lent (together with a Return for allowing Finder Wallet to use their capital).

Finder Wallet's defence hinged upon the assertion that the Finder Earn product did not involve any undertaking by Finder Wallet to repay moneys deposited with it (being AUD) as a debt and therefore the product did not constitute a debenture within the meaning of section 9 of the Corporations Act.
 
To put it simply, there was no deposit or loan. Rather, there was a purchase by the customer of an investment which was recoverable as a contractual right to a Return, not as a right to repayment of a loan as a debt. That is, the allocation did not create a debt owed by Finder Wallet to repay Australian dollars to the customer as a debt.
 
This argument was contingent upon Finder's submission that the process to acquire the Finder Earn product was split into multiple separate transactions:

• firstly - the transfer of AUD into the customer's Finder Wallet account (which was submitted to be distinct and disconnected from the acquisition of the Finder Earn product as opposed to ASIC's contentions);

• secondly - the purchase by the customer of TAUD in exchange for AUD in the customer's wallet, that is, TAUD was transferred or loaned to Finder Wallet for it to use as it saw fit; and

• lastly - an investment involving the allocation (and outright disposal) of that interest in TAUD to Finder Wallet in exchange for the contractual right to the Return, that is, the investment involved remitted of the customer's AUD together with a fixed interest Return for use of the AUD to purchase TAUD.

Accordingly, Finder Wallet submitted that Finder Earn did not involve a deposit with or loan of moneys to Finder Wallet and instead, as specified in the product terms, involved the transfer or loan of TAUD already purchased (the legal title to which was held by Finder Wallet for the duration of the investment term). In effect, the initial deposit of AUD into the customer's Finder Wallet account should be considered separate from the acquisition of the Finder Earn product and thus the contractual right to the Return was not in respect of an obligation to repay the AUD initially deposited but a fixed Return in TAUD, which was then converted into an equivalent amount of AUD and paid into the customer’s Finder Wallet account.

As discussed in our previous article, the Court favoured the arguments of Finder Wallet and found that ASIC had failed to demonstrate that the Finder Earn product met the definition of 'debenture' in section 9 of the Corporations Act.
To come to this conclusion, the Court focused on the following considerations (which replicates the statutory criteria imposed by section 9):

• whether there was chose in action?

• whether money was deposited with or loaned to Finder Wallet?

• whether there was an undertaking by Finder Wallet to repay moneys "deposited or lent" as a debt.

 The Court found that a customer who acquired the Finder Earn product had a contractual right at the end of the Earn Term as against Finder Wallet to the credit of TAUD equivalent to the Return which was enforceable as a chose in action at common law.
 
Interestingly the Court placed heavy reliance on the decision of the Full Federal Court in ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1 (ABN Amro) and sounded a warning that, at law, not all contingent debts may be debentures:

"However, as the Full Court cautioned in ABN Amro(at [689]) “not every chose in action which includes an undertaking to make payment of a sum of money, dependent upon any form of contingency, constitutes a debenture of the type contemplated in s 9. The same may be said of an undertaking to make payment of a sum of TrueAUD, as is the case here."

 The Court found that the moneys paid by the customer was not a deposit with or loan of moneys to Finder Wallet, but rather the transfer or loan for the purchase of the TAUD, an asset, the legal title to which was held by Finder Wallet for the duration of the Earn Term.
 
This was primarily because the Court found the initial deposit of AUD into a customer's Finder Wallet account was distinct from the acquisition of the Finder Earn product, in particular because the customer could use funds in their Finder Wallet account (AUD) for the purchase and sale of other various cryptocurrencies, i.e. those funds were not simply transferred or made available for the sole purpose of acquiring the Finder Earn product.
 
Instead, it was the TAUD subsequently acquired in exchange for AUD in a customer's Finder Wallet account that was transferred or loaned to Finder Wallet for use as it saw fit.
 
In this regard the Court stated:

"The customer started with AUD (or a chose in action the equivalent of a credit amount in a bank account) and received in exchange a promise to repay that amount with interest.
 
However, Finder Wallet’s obligation, as set out in the Terms, was to repay the TrueAUD allocated or transferred to it by the customer plus the Return in TrueAUD, to convert that amount to AUD and pay the AUD equivalent amount into the customer’s Finder Wallet account.
 
The customer did not actually acquire ownership of TrueAUD, because the “conversion” of AUD did not involve Finder Wallet transferring TrueAUD to the customer, even for a juridical moment, and did not involve the actual transfer of title to TrueAUD to Finder Wallet." 

 The Court relied on the decision of the Full Court in ABN Amro which noted that the words "to repay as a debt, money deposited with or lent to", when read in light of the regulatory provisions in Chapters 2L and 6D, import the "notion of an undertaking to repay a debt comprising a loan made to the company as part of its working capital".

The Court applied this imported meaning and concluded that it was difficult to identify how a deposit or loan was made to Finder Wallet as part of its working capital given that the purpose of the Finder Earn product was to promote the growth and use of the Finder App and not for use as capital. Notwithstanding, there was equally no undertaking by Finder Wallet to repay any moneys as a debt.
 
Accordingly, the Court reverted to its classification of the Finder Earn product as a contractual promise to remit TAUD to the customer of an amount equal to the Return as distinct from a promise to repay deposited or loaned moneys as a debt (which would otherwise indicate that the product was a 'debenture').
 
Whilst the Court found that there was a parallel that banks accept deposits from customers principally as a way of raising capital, the Court identified that this was not the purpose of a transfer by a customer of funds into a Finder Wallet account. Without the necessary classification of 'deposited' or 'lent' moneys, the Finder Earn product could not be classified as a 'debenture' within the definition of section 9 of the Corporations Act.
 
Overall the Court held that the customer made an investment in the Finder Earn product by allocating the customer’s TrueAUD to Finder Earn in exchange for the Return which is not in the nature of a debenture.

Whilst common law principles apply to the meaning of debenture, the section 9 definition will guide its meaning for the purposes of the Financial Services Regime. That is, a 'debenture' of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a charge over property of the body to secure repayment of the money.
 
Significantly, the Court's reliance on the decision of the Full Court in ABN AMRO drove an emphasis on how chapters 2L and 6D of the Corporations Act "recognise that the nature of a debenture is, as it always has been, inextricably bound up with its function as an important aspect of corporate fundraising". In the Court's view the Finder Earn product did not possess this nature which lent itself to the conclusion that it was incorrect to classify the product as a 'debenture'.
 
This decision is not yet settled however. ASIC has lodged an appeal to the full bench of the Federal Court which demonstrates its persistence in attempting to regulate novel crypto-investment products in the context of the existing Financial Services Regime and its current definitional boundaries, despite such framework not having necessarily been constructed to regulate or contend with such products. In this regard, our next article in this series will explore ASIC's appeal of the decision and its revised contentions.