Federal Court finds ‘Block Earner’ provides unlicensed financial services in relation to ‘Earner’ crypto product

On 9 February 2024 the Federal Court found fintech Block Earner breached section 911A of the Corporations Act 2001 (Cth) by providing unlicensed financial services in offering its crypto backed ‘Earner’ product.  At the heart of the contravention was the Court’s finding that the ‘Earner’ product was a financial product.  The Court found so by concluding Earner was a ‘managed investment scheme’ (MIS) or a ‘facility through which a financial investment is made’.  A consequence was that Block Earner also contravened section 601ED(5) by operating an unregistered MIS.

To specialists in this field, these are well known ‘catch-alls’ which ASIC will often pursue as a means of regulating products or services which it perceives as harmful and which do not otherwise fall neatly into the financial services laws.  

The case serves as a practical roadmap of how ASIC will allege a product or service is a MIS or financial investment facility.  It is also a clear example of the risk fintech operators face from ASIC where their offerings are at the forefront or seen by the Regulator as operating at the ‘margins’ of financials services.

Key Takeaways

• Federal Court finds Block Earner breaches financial services laws by providing unlicensed financial services, a civil penalty provision.  Block Earner will now face pecuniary penalties.
• The judgment turned upon the Earner product being a MIS or facility through which a financial investment is made, and therefore a financial product (and by extension Block Earner providing a financial service).
• Each of the MIS and ‘financial investment facility’ definitions are each broad, and ASIC will often utilise them in actions against products or services that do not otherwise fit within the general or specific definition of financial product.
• The judgment is a neat illustration of the material regulatory risk unlicensed fintech’s face in developing and offering products which are seeming unregulated or at the margins of financial services – it demonstrates how ASIC will bring a case to capture such products or activities and thereby regulate them and potentially punish operators.

The Court’s Findings

In the Block Earner case (ASIC v Web3 Ventures Pty Ltd [2024] FCA 64), the Federal Court recently found the crypto-backed Earner product, of fintech company Block Earner, to be a financial product. The Court determined that the Earner product was MIS and a facility for making a financial investment. If the Court had not found that it was an MIS, Earner product would have been found to be a derivative. The definition of ‘managed investment scheme’ is broad and is often available as a type of catch-all, when products do not otherwise fall within the general or specific definitions for financial products in the Act.

Under the Earner product customers lend Australian Dollars to Block Earner which are converted into a cryptocurrency nominated by the customer/lender. The return at the end of the loan is calculated by reference to the price of the relevant cryptocurrency plus a fixed rate return.

The Court found Block Earner contravened section 911A of the Corporations Act by not holding an Australian Financial Services Licence and section 601ED(5), by failing to register the MIS and operating it unregistered.

ASIC will now seek orders for pecuniary penalties against Block Earner.

It is worth noting, the Court did not find Block Earner’s ‘Access’ product was a financial product. Access provides users with access to platforms which connect borrowers and lenders in decentralised finance, operating on the Ethereum blockchain.

What to expect from ASIC

ASIC announced recently that it was intervening to protect what it sees as a new wave of retail investors participating in financial markets, with the growth of online trading providers. ASIC see the licensing regime as providing the necessary protections from high risk offers, or unfair or inappropriate business practices.

ASIC Deputy Chair and Head of Enforcement, Sarah Court, also noted that this was one of the first decisions on the application of the financial services law to crypto-backed products and that it provided clarity as to when such products should require licensing.  It can be expected that ASIC will use this precedent to support further enforcement activity in respect of crypto backed products.  

Companies in the fintech space should expect more activity and attention from ASIC, particularly with respect to new or novel products. Also, ASIC will not restrict itself to looking at crypto related products, but all novel or innovative products.  The Block Earner case is an example of how ASIC can go about pursuing these products.

The Federal Court judgment can be accessed here and ASIC’s media release is here.

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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.