The digital assets sector finally received the guidance it has been requesting for more than a year now – an indication of ASIC’s views on the treatment of digital assets under the financial services regime. We discuss the proposed changes, and how you can make a submission to help shape the future of digital assets.
On 4 December ASIC released Consultation Paper 381: Updates to INFO 225: Digital Assets: Financial Products and Services (CP 381). CP 381 sets out ASIC’s proposed updates to Information Sheet 225 Crypto-assets (INFO 225) to provide further guidance about ASIC’s interpretation of how the current financial services laws apply to digital assets. It follows ASIC’s increased enforcement activity in the digital asset sector for the past 12 months, as well as industry calls for further clarity on the regulatory perimeter.
However, CP 381 includes some views from ASIC which seek to extend the regulatory perimeter for digital assets far beyond what has been contemplated for other industry sectors. With feedback due to ASIC by 28 February 2025, now is the time to engage with the proposals and push back on the proposals that seek to extend ASIC’s reach.
No action relief – more questions than answers
The no action proposal in CP381 is that digital asset businesses may be able to access class order relief subject to a number of conditions, which includes applying for an Australian Financial Services Licence (AFSL) within six months of the final INFO 225 being published.
The no action position appears to have been designed to encourage businesses to apply for an AFSL as quickly as possible, and as a result there are many questions about when an application should be lodged, and whether it should it be lodged sooner rather than later.
Before you rush an application, there are a few important things to consider:
- No one currently has the benefit of any no action relief. This is because CP 381 only proposes ASIC’s position and relief will only apply (to the extent a business meets the required conditions) once ASIC issues a final relief instrument.
- ASIC is consulting on whether they should take a different approach to responsible manager competency, but in the meantime, the usual position applies. This poses several challenges, and we cover this in more detail below.
- If you lodge an application early, it is more likely that your application may have some weak spots or deficiencies, as ASIC’s position in draft INFO 225 on some things may be unclear, untested or contentious. This may result in the rejection of your application, which may disqualify you from relying on no action.
- It’s unclear when ASIC may notify a business it can’t access the no action relief, as there currently aren’t any conditions or qualifications on when ASIC can withdraw relief.
- It is also unclear what ASIC views operating a business before the publication of CP 381 to mean and whether it covers businesses who have been engaging with ASIC on an AFSL but have not yet launched their offering to the market.
- Whether new token listings or products / services launched by an existing business after 4 December will have the benefit of the no action relief.
- Whether a business will receive the benefit of the no action relief if it applies for an AFSL but that application doesn’t cover some of the financial services that ASIC considers the business provides (whether the business agrees or not).
Before you do anything new, make sure you get advice first to understand the risk this may pose to ultimately seeking to rely on ASIC’s proposed no action position.
Responsible managers in the spotlight
CPS 381 is seeking feedback on whether any changes should be made to ASIC’s standard position on responsible manager competency requirements. In the meantime, it appears ASIC will continue to use the current five options.
There will be major challenges in sourcing responsible managers with the requisite expertise and experience. The responsible manager pool is small at the best of times, and some authorisations have always been hard to find, such as custody, miscellaneous investment facility and, of late, non-cash payments. On top of this, it will be almost impossible to find responsible managers to support certain authorisations necessitated by ASIC’s draft guidance. This is because some of these authorisations haven’t been relevant to date for TradFi. For example, making a market for non-cash payment facilities and securities. This is further complicated by the fact that many candidates with prior experience have been operating in the digital asset industry for over 10 years and much of their regulated experience in TradFi may be dated.
It is also possible that ASIC may release further guidance in relation to the responsible manager requirements as they apply to digital assets, and this may result in in the easing of the requirements. Further, it is possible that ASIC’s experience with licences lodged earlier may inform changes they need to make to the responsible manager requirements. So, applying early may mean losing out on any relaxation by ASIC of the responsible manager requirements. This means if you don’t have clear responsible manager candidates in your existing business, it may be better to wait.
On the flip side, the longer you leave your application, the more difficult it may be to source suitable responsible managers if you don’t have candidates and ASIC does not relax the requirements. Balancing these risks is no simple task and your approach will ultimately be driven by your risk appetite and business strategy.
The problem with identifying the relevant facility
Draft INFO Sheet 225 does not properly explain the importance of the concept of the “facility”, nor does it draw on the judgement in Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 (Qoin case) (see our blog) to explain how one determines what the relevant facility is.
Also, some of ASIC’s draft guidance seems to blur the lines and expand the definition of a facility. For example, ASIC has said that bundled arrangements may amount to a facility. They have also stated that a token cannot be separated from its associated bundle of rights, benefits, expectations and features.
Both of these ideas are problematic because they gloss over the importance of identifying the correct facility. In some instances, there are multiple possible “facilities” that might need to be considered, for example:
- The token
- The blockchain
- A wallet
- Some other product, platform, or arrangement between an entity and a person.
A more nuanced approach is required. We do not agree that the distinctions between these things can be glossed over to treat one, or more (or all) of these things as financial products just because one of them meets the definition of a financial product.
Stablecoins
In our experience, not all stablecoins are equal and it is possible that some stablecoins may be unregulated and others may meet the definition of a financial product (and there are often more than one possible financial product definitions to be considered).
Draft INFO 225 doesn’t currently include any detailed guidance or examples (other than a yield bearing stablecoin) on the different types of stablecoins and what financial product definitions may apply. It appears ASIC is still firming up its view on this and is asking industry for feedback.
However, given some of ASIC’s commentary in CP 381 about stablecoins specifically and more generic statements about bearer instruments in relation to non-cash payment facilities, it is clear that ASIC is minded to treat a stablecoin token (not the broader facility i.e. T&Cs and technology) as the non-cash payment facility. There are some fundamental issues with this approach as it brushes over what is the facility and the role of the token, especially in light of the Qoin case, and creates markets licensing and AFSL implications for any exchange that lists the token.
Insufficient guidance on asset-backed tokens
Example 5 in draft INFO 225 covers a gold backed token issued and promoted by a company, which uses the sale proceeds to buy gold and holds the gold beneficially for tokenholders. We tend to agree with ASIC’s view that this token is likely to represent an interest in a managed investment scheme. However, there are several ways to structure an asset-backed token that are not financial products. For example, a bailment structure or exempt derivative structure. We think it is important that ASIC’s guidance acknowledges these other structures and provides examples of them.
Broadening the scope of Investment Facility
We think that ASIC’s guidance on what is a facility for making an investment (Investment Facility) is adopting a broader interpretation than the current case law.
For instance, Example 1 in draft INFO 225 basically provides that where a company (issuer) issues a token, uses the token proceeds in the business (as it represented it would do, to drive value for tokenholders) and the value of the token goes up, this will be an Investment Facility, regardless of the reason the token value appreciated.
In our view, an asset’s capital appreciation on its own is not an Investment Facility, even where representations are made about the asset’s value going up. This is because there needs to be a causal nexus between the value contributed, the asset appreciation, the representations made and what the person did with the contribution.
We think ASIC’s draft guidance on this needs to be refined to ensure that the guidance on what is an Investment Facility better aligns with current case law on when a person generates a return for themselves versus when a contribution is made to a third party to generate a return for the person.
Wrapped tokens: is the guidance nuanced enough?
As currently proposed, the definition of wrapped tokens may be broad enough to capture bridged tokens between chains as derivatives. We think this needs to be considered further, as bridged tokens should be distinguished from wrapped tokens (which may be used for liquid staking or other yield bearing activities in decentralised protocols). This is because bridging moves an actual digital asset between blockchains, whereas wrapping involves creating a tokenised representation of a digital asset from one blockchain on a different blockchain (which is usually pegged on a 1:1 basis).
We also think that wrapped tokens need to be looked at more closely, because the token may not be the derivative, the derivative may exist at a broader facility level. That is, a new financial product may have been created over the top of the token.
Have your say and make a submission
ASIC is seeking feedback on the proposed updates by 5pm on 28 February 2025, with plans to finalise the proposed updates to INFO 225 by mid-2025.
Hamilton Locke will lodge a submission that covers the above points and more. Now is the time to raise your voice and flag any issues, gaps, uncertainties or risks. The more submissions the better, and the more consistent the submission themes, the more impact. There are three ways to get involved:
- Make a submission directly to ASIC
- Contribute to industry body submissions
- Engage directly with ASIC
Submissions are due by 25 February 2025.
For more information about any of the points raised in this article or what it might mean for your business, please contact Jaime Lumsden or Michele Levine.
