ASIC Enforcement Wrap: February 2024 | More clarity on crypto-asset regulation from Federal Court decision

Key February Takeaways:

• ASIC successful in Federal Court action against Block Earner in significant crypto-related decision. See the ‘Spotlight’ below.
• ASIC maintains focus on combating financial harm against First Nations people with:
  • appeal win against ACBF and Youpla in the funeral expense insurance case; and
  • interim stop order preventing Urban Rampage stores from accepting payment for goods through Centrepay deductions;
• Elepay, a ‘buy now, pay later’ or BNPL provider aimed at funding expenses in preparing properties for sale, offered ASIC a court enforceable undertaking that it will refund all fees and charges of clients that fell outside its target market.
• ASIC has in effect bankrupted social media finfluencer Tyson Robert Scholz, also known as “ASX Wolf”.

Spotlight – Block Earner Decision provides more clarity on extent of crypto-asset regulation

ASIC was successful in a Federal Court case against Block Earner (the trading name of Web3 Ventures Pty Ltd) with the Court finding Block Earner contravened financial services laws by offering the “Earner” product without holding an Australian Financial Services License, finding that Earner was a managed investment scheme or facility through which a financial investment is made, and therefore a financial product.

But ASIC was unsuccessful in its claim that a further Block Earner product, “Access” product, was also a financial product.

This is an interesting decision while it demonstrates how a crypto-related product can fall within present financial services laws, it also demonstrates that not all crypto related will. This judgment will aid in determining when a crypto product would be considered a financial product, and in particular a Managed Investment Scheme or ‘financial investment facility’.

The Earner product allowed customers to lend AUD to Block Earner on fixed interest rates, and the lent funds were then converted to a cryptocurrency. Block Earner then lent these cryptocurrencies to third parties to earn an income. When customers withdrew from the Earner product, most customers converted their eligible cryptocurrency to AUD according to the prevailing exchange rate.

In a key element of the decision, the Court found that there was pooling of contributions to produce a financial benefit, because Block Earner had represented that it was able to generate a favourable yield rate by pooling customer funds and lending it to third parties.

The Court referenced a previous decision where an MIS was found in cases where “a representation was made to investors that by lending money to the promoter of the scheme the investor would derive a return, sometimes a very high return, out of the anticipated successful operation of the scheme, which was to be operated using the vaunted skills of the promoter.”

On the other hand, the Access product provided Block Earner customers access to Decentralised Finance (DeFi) protocols, where the customers can directly lend or borrow cryptocurrencies on the market, and earn a variable yield. Block Earner does not act as a central counterparty to the transactions. Instead, Block Earner provides the Access services by assisting customers convert AUD to eligible cryptocurrencies, and holding these cryptocurrencies on behalf of the customers in an omnibus account.

The Court did not find the Access product to be an MIS, because there were no contribution of money or monies worth to the scheme, and there was no pooling of assets. The Court noted that the performance of each customer’s holding of cryptocurrency is treated on an individuated basis, instead of being fixed across the board. Also, each user retains ownership of the cryptocurrency they hold.

As the decision shows, slight differences in the structure of a product may have significant implications on how that product is regulated under Australian laws. Specialist advice is key in establishing new products in the evolving legal and regulatory landscape.

You can read our short article on the decision here.

February in Summary – Enforcement Actions and Outcomes

Civil Action:

Civil Proceedings Commenced

ASIC commenced one civil proceeding in:

• ASIC commenced proceedings in the Federal Court against David Paul Hodgson, MacroLend Pty Ltd and Great Southland Limited, companies belonging in the Paladin Group, alleging unlicensed financial services and misrepresentations to investors. ASIC alleges that since January 2015, Macrolend, an unlicensed entity, raised over $47.4 million from 169 investors, then used some of the money to invest in software product developed by Kradle Software, a Paladin Group company. ASIC claims investors were told that Kradle Software had intangible assets of $1.02 billion, when its balance sheet only recorded intangible assets of $11,180.

Appeals

• The Full Court upheld ASIC’s appeal in its case against ACBF Funeral Plans Pty Ltd (ACBF) and Youpla, finding that ACBF misrepresented to Aboriginal consumers that it was Aboriginal owned and managed, when it was not. The Full Court was satisfied that evidence before the trial judge was sufficient to prove that ACBF did not have Aboriginal ownership or management. This overturns an earlier decision by the Federal Court.

Other Decisions

• The Federal Court has ordered Brite Advisors Pty Ltd be wound up on just and equitable grounds following an application by ASIC. The Court considered key findings from investigative accountants which found that 1) There was a US$69 million difference between the amount Brite told its clients and their beneficiaries that it held on their behalf, and the amount of assets that the investigative accountants found Brite held with financial institutions; and 2) Brite was likely insolvent from at least 27 October 2023.
• The Federal Court has found that fintech company Block Earner engaged in unlicensed financial services when offering a crypto-backed product named Earner, which allowed consumers to earn fixed yield returns from different crypto-assets. On the other hand, ASIC was unsuccessful in arguing that the Access product, which offers variable yield, as a financial product. The Court will hear from the parties in a later date on pecuniary penalties.
• The Federal Court has made interim travel restraint orders against Liang Guo (aka Allan Guo), which prevents Mr Guo from leaving Australia until August 2024. ASIC is currently investigating Mr Guo, amongst other people, over his role in the collapse of crypto-asset exchange operated by Blockchain Global. ASIC sought the orders based on concerns that Mr Guo may leave Australia during the investigations, due to his ties with China, where he is a citizen.
• The Federal Court has made sequestration orders against social media finfluencer Tyson Robert Scholz, which in effect makes Mr Scholz bankrupt. ASIC sought the sequestration orders after Mr Scholz failed to pay a costs order in ASIC’s favour which followed civil proceedings brought by ASIC against him in December 2021.

Criminal:

Guilty Pleas/Convictions – Two Defendants made guilty pleas:

• William O’Dwyer pleaded guilty to six charges of obtaining a financial advantage by deception, including in relation to finance facilities totalling $251 million. William was sentenced to four years imprisonment with a non-parole period of two years and four months; and
• Russell Sandiford pleaded guilty to two charges of dishonest conduct in relation to a financial product in relation to $440,909.71 he obtained from 71 clients.

Charges - Three Defendants were charged:

• Aryn Hala charged with nine offences of carrying on a financial services business without a licence; and
• Joseph Cullia and Zoran Markovic charged with 23 offences, including dealing with proceeds of indictable crime (to the value of $1,000,000 or more), and possession of identification information intended to be used to commit an indictable offence.

Administrative Action:

Financial Services Bannings

One individual, Mark Raymond Sebo, was banned by ASIC from financial services following convictions of fraud.

Licence Cancellation/Suspension

Three companies had their AFSL cancelled:

• Brava Capital Pty Ltd, because it no longer provides financial services.
• Volorton Capital Pty Ltd, because it never provided any financial services since its license was granted in October 2022.
• NextGen Financial Group Pty Ltd, because it was wound up.

Infringement Notices

Melbourne Securities Corporation Limited was issued an infringement notice for alleged misleading statements regarding its Bloom Climate Impact Fund.

Stop Orders

ASIC issued stop orders in respect of products offered by two companies, being:

• Shield Master Fund – stop orders were issued in respect of four PDSs for units in the fund, promoted by Keystone Asset Management Ltd. ASICs concerns regarding the PDSs included that the PDS:
  • used inappropriate asset classifications to describe the investments in the underlying funds and the investments within those funds; and
  • gave the impression that investors can make weekly withdrawals, when redemptions are actually at the absolute discretion of Keystone and subject to a two-year lock-up.
• Against the proprietor of Urban Rampage retail stores, prohibiting it from entering agreements where customers pay for goods on credit through Centrepay deductions. Urban Rampage mainly target customers in remote Indigenous communities, and ASIC is concerned that these consumers are vulnerable and at risk of financial hardship. Moreover, ASIC alleges that such deferred deduction arrangements are inherently unsuitable for the consumers, and do not meet their likely needs, objectives and financial situation.

Court Enforceable Undertaking

ASIC has accepted court enforceable undertakings from two parties:

• Elepay, a BNPL provider offering funding to property owners for expenses in preparing their property for sale.  ASIC contended Elepay’s products are financial products, but Elepay did not have TMDs for the said financial products until March 2023. Elepay has offered, and ASIC has agreed to accept an undertaking that it will engage an independent expert to report on, amongst other things, determine which of Elepay’s clients fell outside the target market identified in the TMD, and to refund all fees and charges of those clients; and
• Shivdeep Jaidka, after ASIC was concerned that Mr Jaidka had failed to comply with best interests obligations of the Corporations Act 2001 (Cth).  Mr Jaidka has agreed that he will not carry on a financial services business or provide financial services for a period of 5 years.

SMSF Auditors – ASIC has taken action against nine SMSF auditors:

• Five SMSF auditors were disqualified and are not eligible to apply for registration;
• Two SMSF auditors had additional conditions imposed on their registration; and
• Two SMSF auditors had their registration cancelled.

If any of the above is relevant to you or you want to know more, please feel free to get in touch.

‍

The contents of this article do not constitute legal advice and it is not intended to be a substitute for legal advice and should not be relied upon as such.  It is designed and intended as general information in summary form, current at the time of publication, for general informational purposes only. You should seek legal advice or other professional advice in relation to any particular legal matters you or your organisation may have.

‍