The judgment in ASIC v Web3 Ventures Pty Ltd (trading as Block Earner) was released today and has been greatly anticipated. The matter focused on two products offered by Block Earner, "Access" through which customers could send funds through to Aave and Compound, prominent DeFi lending protocols which compensate lenders for depositing cryptocurrency, and an "Earner" product, which paid users interest on crypto, and which was discontinued in November 2022. ASIC alleged that Block Earner should have obtained a financial services license to offer the Access and Earner products as it had created a facility through which a person makes a financial investment, that the products were an unregistered managed investment scheme or were a derivative.
The Earner product operated by users lending cryptocurrency to Block Earner in return for daily interest payments. Block Earner took that cryptocurrency and loaned it to others for higher interest rates than the users were being paid. Importantly Block Earner had published a statement that the yields on Earner were from "pooling customer funds and lending it to our trusted partners" and despite claiming this statement was a mistake the Court found the description reflected reality.
The Court noted the ongoing legal controversy as to whether cryptocurrency is property at common law but sought not to take a position on this question to address the financial services aspects of the case, but later the Court noted that if cryptocurrency is not property there is difficulty in the application of the current regulatory regime to the Earner product.
The Court found that the Earner product met the definition of a managed investment scheme in that:-
Investors paid money or money's worth to obtain a benefit (being payment of interest); and
The benefits were generated from pooling or a common enterprise; and
There was no day to day control of the scheme by investors.
The Court also found that the Earner product met the definition of a financial investment, which requires that:
An investor provide money or money's worth and expect the other person to use it to generate returns (or the other person expects that or in fact does generate a return); and
The investor has no day-to-day control over the use of the contribution.
The Access product operated by means of an omnibus account, where users who wished to access DeFi protocols pooled their tokens with others and Block Earner's tokens and Block Earner passed the tokens though, tracked returns from the protocols and credited those returns to the customer's accounts.
In relation to the Access product, the Court rejected ASIC's argument that "pooling" in the omnibus account satisfied the pooling requirements of the managed investment scheme definition, finding that ASIC had not properly pleaded this claim in the first instance, but that even if the matter had been the subject of proper pleading, there was no evidence that the pooling itself generated benefits, such as individual account fees being saved, and there was no representations that the omnibus accounts were providing any benefit, such as saving on individual account fees.
The Access product was also found not to meet the definition of a financial investment given the pass-through nature of the service. The Court compared Block Earner to a 'broker' connecting users to smart contracts and referred to the notation in the definition of financial investment to the effect that the giving of money to a broker for the purpose of purchasing shares, in and of itself, is not a financial investment.
ASIC also failed to show the Access product met the definition of a derivative, as the Court accepted it was a "contract for the future provision of services" and so exempted from the definition in the Corporations Act. Had it not met that exemption, the Court would have found it was otherwise within the (extremely broad) definition of derivative.
This important decision provides some clarity as to when crypto-backed products should be considered financial products which require licensing under the law.
Until the regulator or government provides a pathway to compliance for crypto products of this kind, the decision stands to highlight:
The importance of extremely careful analysis and design of products involving crypto-assets, particularly those offering yields; and
The need to ensure careful consideration and alignment of representations and ongoing marketing and terms and conditions.