Author: Michael Bacina
The Australian Stock Exchange (ASX) has been lauded globally for their early movement into the distributed ledger technology (DLT) space. The ASX project to replace the ageing CHESS system, is rightly reported as cutting edge technology which could bring new efficiencies to share trading.
However, the ASX’s welcoming of DLT still does not extend to the world of cryptocurrency, with a new compliance update regarding cryptocurrency-related activity being released on 1 August. ASX has previously raised concerns about cryptocurrency-related activities in Listed@ ASX Compliance Update no 09/17 on 30 October 2017 and no 01/18 on 16 February 2018 and continues to strike a very cautionary tone towards crypto-asset and cryptocurrency related projects.
ASX’s position remains unchanged, that listing a cryptocurrency-related business will involve satisfying ASX that:-
- The applicant has a structure and operations appropriate for a listed entity;
- The business is bona fide;
- The business will comply with all applicable legal requirements in Australia and in all jurisdictions where it is proposes to carry on business; and
- Proper disclosure has been made to investors of the risks (including emerging regulatory risks) involved in cryptocurrencies and crypto-assets.
Despite providing some further details, the new guidance remains close to previous ASX updates. ASX considers cryptocurrency-related activities raise “significant legal, regulatory and public policy issues”, but notes that there is an ongoing increase in interest from both unlisted and listed entities. ASX states that its “concerns regarding cryptocurrency-related activities have been reinforced and amplified” by:
- the UK’s Financial Conduct Authority (FCA) releasing its consultation paper ‘CP19/3: Guidance on Cryptoassets’ in January 2019 (since followed by its policy statement PS19/22);
- the USA’s Commodity Futures Trading Commission publishing a customer advisory ‘Use Caution When Buying Digital Coins or Tokens’ on 16 July 2018;
- the (fairly long) list of enforcement actions being undertaken by the USA’s Securities and Exchange Commission (SEC);
- China and South Korea banning Initial Coin Offerings (ICOs); and
- a “number of prominent social media site...” bans on advertising ICOs.
The FCA’s Policy Statement provides a token taxonomy including stating that “exchange tokens” which provide “little to no rights to holders” were outside the “regulatory perimeter” in the UK, but importantly noting that the offer of payment services using such tokens is likely to be regulated (as would be the case in Australia). Further, the FCA states that they consider a “utility token” which provides “consumers with access to a current or prospective product or service and often grant rights similar to pre-payment vouchers” to be outside of the regulatory perimeter. This categorisation is much clearer than the guidance published by regulators to date in Australia but may assist as our regulatory framework develops.
The SEC has a history of enforcement actions against ICOs, but there has been two no-action letters recently issued and the first regulated ICO under Regulation A+ has occurred. On 27 June 2018, Facebook relaxed its stance on advertising of token offerings in order to allow advertisements from advertisers who had received prior written approval, and in May of this year, Facebook relaxed the approval process further. Twitter and Google maintain a ban on any ICO advertising.
ASX draws attention to INFO225, ASIC’s guidance on ICOs and crypto-assets, most recently updated on 30 May 2019, reiterating ASIC’s view that many ICOs and Initial Exchange Offerings (IEOs) are likely to be managed investment schemes (MIS), which requires the issuer to hold an Australian Financial Services Licence (AFSL). To demonstrate compliance with ASIC’s guidance and the ASX listing rules, ASX “strongly encourages” listed entities to seek legal advice from a reputable Australian law firm before engaging in any cryptocurrency-related activity.
ASX has taken the extraordinary step in this guidance of indirectly criticising legal advice which listed entities have provided to ASX, saying:
“ASX is aware of … law firms providing advice that tokens … are not a financial product … The examples ASX has seen … do not appear to have considered all of the issues involved in this complex question … in particular whether or not the ICO or IEO involves an offer of an interest in a managed investment scheme.”
