New ASIC cryptocurrency guidance: What you need to know
Are you handling crypto financial products? Do you need an Australian Financial Services Licence?
- New ASIC clarifications on crypto-assets mean that even "safe" cryptocurrencies may be classified as financial products.
- Wallet providers, exchanges, intermediaries and many other crypto-related businesses may require an Australian Financial Services Licence to handle financial products.
- The laws apply to any business with Australian customers, even if the business is based overseas.
The Australian Security and Investments Commission (ASIC) has updated its guidelines on ICOs and crypto-assets. Taken as a whole, it looks like these clarifications show that a crypto fence is being built around Australia, and that a lot of the crypto-related businesses and assets already available in Australia may technically be on the wrong side of the fence.
Whether anything actually eventuates from this remains to be seen, but one logical conclusion of the rules is that some overseas businesses will have to bar Australian customers, that certain digital assets will not be available to Australians and that gatekeepers will emerge to protect hapless consumers from themselves.
As ASIC says: "The definition of a financial product in Australia is often broader than in other jurisdictions. As such, crypto-assets such as utility tokens that may fall outside the regulatory perimeter in another jurisdiction may often be covered under our broader definition."
Note: None of this is legal advice. Do not make any decisions whatsoever based on anything you read on this page, unless that decision is to consult a lawyer.
From a high-up angle, the crop of rules basically says:
- A lot of cryptocurrencies, even supposed "utility tokens", are technically financial products.
- Entities that deal with financial products need to be appropriately licensed, which will typically mean an Australian Financial Services Licence.
When is a crypto-asset a financial product?
A crypto-asset may be one or more exciting flavours of financial product, including:
- A security
- A derivative
- A managed investment scheme
- A non-cash payment facility
Based on the descriptions of each, it sounds like many cryptocurrencies and some related services will have to work very hard to not be a financial product.
"When an ICO is created to fund a company (or to fund an undertaking that looks like a company) then the rights attached to the crypto-asset issued by the ICO may fall within the definition of a security," ASIC advises.
Exchange tokens sound like they would fall into that category. It's safe to say Bitfinex's LEO token is being used to fund a company – or to fund "an undertaking that looks like a company", if you want to be rude about it.
"A 'derivative' is a product that derives its value from another 'thing' which is commonly referred to as the 'underlying instrument' or 'reference asset.' The underlying instrument may be, for example, a share, a share price index, a pair of currencies or a commodity (including a crypto-asset)."
Collateralised stablecoins of any kind fit precisely into this category, as do the more exotic algorithmic stablecoins. Exchange tokens that technically derive their value from another "thing" – the exchange trading volumes – are arguably derivatives as well.
Plus, the entire market follows Bitcoin prices. Maybe every cryptocurrency is a derivative?
Managed investment schemes
A managed investment scheme is a system where people contribute money or assets to obtain an interest in the scheme, where the contributions are pooled to produce financial benefits, and where contributors do not have day-to-day control over the operation of the scheme but, at times, may have voting rights or similar benefits.
Pretty much every ICO-funded cryptocurrency in existence arguably fits the bill.
Any cryptocurrency which has a burn schedule or a developers' pool almost certainly does. Per ASIC:
"If the value of the crypto-assets acquired is affected by the pooling of funds from contributors, or the use of those funds under the arrangement, then the ICO is likely to be a managed investment scheme."
Non-cash payment facilities
"A non-cash payment (NCP) facility is an arrangement through which a person makes payments, or causes payments to be made, other than by the physical delivery of currency."
"This type of facility can be a financial product which requires an AFS licence if payments can be made to more than one person. An intermediary that arranges for the issue of an NCP facility may need an AFS licence, or to act on behalf of an AFS licensee."
Most smart contracts are arguably non-cash payment facilities.
What you need to do if you touch financial products
Your legal obligations will vary depending on what kind of financial product you touched, and where you touched it.
You're probably going to need to hold an Australian Financial Services Licence and do a lot of paperwork. Or just slap a warning label somewhere saying "no Australians allowed".
The licence conditions will vary depending on what kind of financial product you're issuing.
You're providing custody services for financial products. You'd better believe you'll need a licence for that.
ASIC said it best. Bolded for emphasis.
"Where a crypto-asset is a financial product (whether it is an interest in a managed investment scheme, security, derivative or NCP facility), then any platform that enables consumers to buy (or be issued) or sell these crypto-assets may involve the operation of a financial market."
"To operate in Australia, the platform operator will need to hold an Australian market licence unless covered by an exemption. There are currently no licensed or exempt platform operators in Australia that enable consumers to buy (or be issued) or sell crypto-assets that are financial products. Platform operators must not allow financial products to be traded on their platform without having the appropriate licence as this may amount to a significant breach of the law."
What happens next?
Assuming the regulations are actually as broad as they can be construed to be, that they're going to be seriously enforced, and that existing coins can be classified as financial products, this could have two main impacts.
The first is that overseas businesses and cryptocurrency services will put Australia at the top of their list (it's in alphabetical order) of banned countries.
The second is that local, and some overseas, businesses will start making AFSL applications.
ASIC lays out its expectations quite clearly:
"Where a financial product is to be exchange-listed, we expect licensed Australian market operators will play an important gatekeeper role in ensuring the suitability of issuers and the products they are permitted to list and trade on their markets."
Cryptocurrency is growing up, whether it likes it or not.
Disclosure: The author holds BTC, BNB, ATOM, IOTA at the time of writing.