Author: Michael Bacina - Partner, Piper Alderman
So what’s new?
1. Many ICOs are managed investment schemes
ASIC has emphasised that ICOs and cryptocurrency may be financial products in its recent update to information sheet 225 (INFO225). On 3 May 2018, ASIC updated its INFO225 which provides a timely reminder that ICOs may be managed investment schemes that require disclosure documents under the Corporations Act 2001 (Cth). The definition of “managed investment scheme” is quite broad in Australia and any rights described in the whitepaper that may arise in the future or on a contingency will be considered by ASIC when determining if an ICO is a managed investment scheme, shares, derivative or non-cash payment facility.
In early May, Australian betting platform Neds discontinued their ICO after the Australian Newspaper reported that ASIC considered Neds to be offering securities without complying with Chapter 6D of the Corporations Act and their whitepaper was potentially misleading and deceptive. Neds was looking to raise over $55 million in an ICO and promised that NedsCoin holders would receive a percentage of revenue each year. Clearly the features of this token indicated that the ICO was an offer of securities.
2. ASIC has delegated powers from the ACCC for misleading and deceptive conduct
Any misleading or deceptive conduct relating to ICOs, whether a token is considered a financial product or not, will be under the scrutiny of ASIC. On 1 May 2018, ASIC issued a media release confirming that ASIC has been contacting entities conducting ICOs that made potentially misleading or deceptive statements in their ICO marketing material under recently delegated powers from the ACCC.
ASIC has provided the following examples of conduct that may be misleading or deceptive including:
- use of social media to generate the appearance of a greater level of public interest in an ICO;
- undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for an ICO or a crypto-asset;
- failing to disclose adequate information about the ICO; or
- suggesting that the ICO is a regulated product or the regulator has approved the ICO if that is not the case.
3. AML/CTF laws apply to ICOs
AUSTRAC director, Mr Tony Prior, confirmed at a recent Sydney Fintech event that the new anti-money laundering and counter-terrorism financing (AML/CTF) laws regulating Digital Currency Exchanges also applies to ICOs. This means that any ICOs that plan to accept fiat currency for their tokens under the ICO will be seen by AUSTRAC to be in the business of operating a Digital Currency Exchange business and will need to register with AUSTRAC and develop their own AML/CTF policies before accepting fiat currency.
In addition, Digital Currency Exchanges are reminded that registration with AUSTRAC does not mean they are “approved” or “authorised” by any government authority or regulator, and should not include any such statements as it might be deemed misleading or deceptive by ASIC.
On 11 April 2018, AUSTRAC issued a media release reminding Digital Currency Exchanges of their obligations and that AUSTRAC will be data sharing with other government agencies to ensure compliance with the AML/CTF laws.
4. Cryptocurrency exchange platforms may require a licence to operate
ASIC Commissioner, Mr John Price at a recent Sydney Fintech event has warned that digital currency exchanges may be creating a financial market and require an Australian market licence. For example, a cryptocurrency business may be regularly quoting prices at which people can buy or sell financial products or operating a facility through which offers to acquire or dispose of financial products are regularly made.
The updated INFO225 provides guidance about platforms that enable trading of ICO tokens and other cryptocurrencies. ASIC has indicated that platforms may be operating a financial market when they enable consumers to buy or sell tokens, where that token is a financial product. This means these platforms will require an Australian market licence, unless an exemption applies.
5. AFSLs may require variation or reapplication for cryptocurrency related financial products
Financial products such as managed funds that seek to invest in cryptocurrency or otherwise expose consumers to cryptocurrency may require a new AFSL or licence variation (such as a new product authorisation) to provide financial services involving the proposed product.
In the updated INFO225, ASIC has stated that they consider applications relating to crypto-asset related financial products to be more likely to be novel applications and assessments of the application to vary an AFSL are expected to take more time.
Take Away
ASIC and other regulators are regularly updating their guidance on the treatment of ICOs and cryptocurrency. Any entity that is looking into tokens or ICOs should ensure that they have considered the regulatory framework of their offering and are up to date with any legal developments as it will have an enormous impact of the success of their business.
The contents of this article are intended only to provide a summary and a general overview on matters of interest. It is not intended to be comprehensive and does not constitute legal advice and does not take into consideration your specific circumstances. We attempt to ensure that the content is current as at 10 May 2018 but do not guarantee its currency. You should seek legal or professional advice before acting or relying on any of the content.
