Unlicensed Firm Block Earner Blocked from Offering Crypto Product

Delivering on its recent enforcement pledge, ASIC has commenced civil proceedings against Web3 Ventures Pty Ltd trading as Block Earner (Block Earner) for allegedly:

• Carrying on a financial services business without a license by issuing the Earner Product (explained below) in breach of  s 911A of the Corporations Act 2001 (Cth) (Corporations Act);
• operating the Earner Product as an unregistered managed investment scheme requiring registration, contravening s 601ED(5) of the Corporations Act

ASIC is seeking orders restraining Block Earner from offering the Earner Product, requiring it to repay customers, and pecuniary penalties.

Earlier this month ASIC announced its Enforcement Priorities for 2023 at its Annual Forum 2022 (AAF2022) and confirmed its commitment to court-based enforcement.  Read our coverage of the Priorities and the Enforcement Commitment here.  ASIC made clear that crypto will be a focus of its ‘risk-of-consumer-harm’ driven enforcement approach.

Just weeks later it has made good on the rhetoric, commencing the proceeding targeting alleged unlicensed conduct by Block Earner relating to crypto.

According to the Concise Statement filed by ASIC on 23 November 2022:

• The “Earner Product(s)” are a suite of products which offered fix yields on various crypto assets:

• USD Earner – based on a crypto-asset called USD Coin;
• Gold Earner – based on a crypto-asset called Paxos Gold; and
• Crypto Earner – based on the crypto-assets of Bitcoin and Ethereum.

• When a user “transfers” a sum of AUD to a specific Earner Product, Block Earner will convert the AUD to the relevant crypto-asset. These crypto-assets are automatically “loaned” by the user to Block Earner on an unsecured basis, who in turn lends these crypto-assets on an unsecured basis to a third party for a fixed yield.
• When a user withdraws from the Earner Product, the user does not withdraw the underlying crypto-assets, but receives a sum in AUD based on the exchange rate between AUD and the relevant Crypto-Asset as at the date of withdrawal.

In the Federal Court action ASIC contends that the Earner Product is a managed investment scheme, a facility through which a financial investment is made, and/or a derivative, and, as a result a financial product, meaning Block Earner was required to hold an Australian Financial Services License (or relevant authorisations under one) to operate the business.

We are expecting ASIC to place significant scrutiny on crypto-assets and related investments, which they view as complex, opaque and posing a major consumer risk.  At present, crypto is effectively unregulated (despite recent promises from Treasury to introduce regulation next year following FTX’s collapse) and ASIC must resort to indirect regulation using existing financial services laws.  This means ASIC will be looking at crypto related product through the prism of management investment schemes and derivatives, to bring them within the definition of financial product, using the requirement for licensing as a starting point in enforcement.  ASIC’s scrutiny will be sharp when the entity dealing with crypto-related product does not hold any financial services license.

This shows that financial firms attempting to issue crypto-related investments need to seriously assess regulatory risk and consider the need to obtain an AFS license at the earliest opportunity. Given the current regulatory landscape, an application for an AFS license for the issuance of crypto investments would likely come back with numerous conditions.  However, this may be less risky than proceeding without  a license and hoping for the best.  The best is unlikely to be very good, with ASIC poised to crackdown on the sector, using AFSL and related obligations as the jumping off point.

Mackay Chapman

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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.

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