For the first time, debenture law has been applied to crypto products or services, with the Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (Finder Case) providing some clarity.
Below, we explore the outcome in more detail, and share our key takeaways across six key questions:
- What was the Finder case about?
- What was the “Earn” product?
- Was the Earn product a debenture?
- Are there any gaps?
- ASIC appeal
- What this means for you?
What was the Finder Earn case about?
ASIC commenced proceedings against Finder Wallet Pty Ltd (Finder) alleging that Finder:
- carried on a financial services business without an AFSL;
- failed to comply with the obligations to provide appropriate disclosure documents for debentures; and
- failed to make a target market determination, which is required for retail product distribution.
The case concerned Finder’s “Earn” product, which purported to allow a customer to make a loan to Finder in return for earning interest. Functionally, this occurred by the customer:
- pre-funding their Finder Wallet with AUD (which could be used for a number of different Finder services);
- “Transferring and converting” to the Earn product, which meant:
- Finder converted some of the customer’s AUD to TrueAUD, a stablecoin;
- The TrueAUD was allocated to the Earn product;
- Under the Finder Earn Terms & Conditions, this loan of TrueAUD to Finder would earn the customer a fixed yield of 4.01% p.a., to be notionally paid by recording an accrual of TrueAUD equivalent to the interest rate;
- being repaid any lent TrueAUD and any accrued (but unpaid) yield on expiry of the term, which was achieved by;
- convert the TrueAUD to AUD; and
- crediting the AUD to the customer’s Finder Wallet.
Importantly, customers were not able to merely convert fiat currency to TrueAUD and then withdraw or retain the TrueAUD. The exchange of fiat to TrueAUD and the allocation to the Earn product all occurred simultaneously (or near to) meaning the TrueAUD never showed in the customer’s Finder Wallet as having been purchased. In addition, customers weren’t able to withdraw the TrueAUD from the Earn product. Rather, when a customer initiated a withdrawal, the TrueAUD was automatically converted to AUD and the AUD was then transferred to the customer’s Finder Wallet. That is, a consumer’s journey for Finder Earn both started and completed in AUD in their Finder Wallet (and no other alternatives were available).
Finder closed down the Earn product and ASIC commenced proceedings after the product was closed.
Was the Earn product a debenture?
A debenture is defined in section 9 of the Corporations Act. Something will be a debenture if it satisfies the following three elements:
- money was deposited with or lent to a body; and
- there is a chose in action issued by a body;
- the chose in action includes an undertaking by the body to repay as a debt the money deposited with or lent to it.
The Court considered whether these three elements were met in relation to the Earn product. As part of this, the court considered previous case law on debentures and what constituted the terms of the Earn product.
What constitutes the Terms?
Before considering whether the Earn product amounted to a debenture, the Court considered what constituted the “terms” of the Earn product. As part of this, the court considered whether the terms were simply the Earn terms and conditions or also included the marketing and explanatory material published by Finder. This was because ASIC argued that the Earn product should be considered a debenture having regard to all these materials, and that these materials collectively governed Finder’s relationship with the customer.
Justice Markovic held that the Earn terms and conditions, and not the marketing or explanatory material located on the Finder App or the Finder Website, governed the relationship between Finder and the customer for the Earn product. In considering this, Justice Markovic considered previous case law on what was required for a party to be bound by an agreement when it is presented online and customers do not actually sign the agreement, but otherwise acknowledge acceptance. The court held that online terms and conditions will bind a party, even if unsigned, provided the party had a reasonable opportunity to consider the terms and by his or her conduct indicated acceptance of them.
Was Earn a debenture?
The court held that the Earn product was not a debenture and dismissed the case. We outline the reasons for this below having regard to the three required elements for a debenture.
| Requirement | Met | Why |
| 1. Is there a chose in action? | ✔ | The parties agreed that the Earn product created a chose in action at common law. This is because, when a customer invested in the Earn product, the customer obtained a contractual right to be paid an amount of TrueAUD (equal to the principal and the return earned) at the end of the term, which could be enforced. The court agreed and held that this first element was satisfied. |
| 2. Was there money deposited with or loaned to Finder Wallet? | X | The Court concluded that this second element was not satisfied.
ASIC contended that the payment of fiat into the Finder Wallet amounted to a promise to repay those funds on demand and that funds deposited into the Finder Wallet were the same in character as funds deposited with a bank. The court rejected this argument as:
The Court determined that there was a two-step process for acquiring the Earn product:
In assessing whether the Earn product was a debenture, the Court considered that only the first step was relevant. In characterising the first step, the Court concluded that this first step merely involved a purchase of TrueAUD with fiat currency credited to the Finder Wallet and this was not a loan of money. This meant the only thing loaned to Finder was the TrueAUD, which was property and not a loan of money. |
| 3. Was there an undertaking to repay moneys “deposited or lent” as a debt? | X | The Court had concluded (in element 2 above) that no money was deposited or lent by a customer to Finder and, therefore, there could be no undertaking to repay a debt. However, for abundant caution, the Court did consider this element using a scenario where it was presumed that the second element had been satisfied. In doing so, the Court considered whether the loaned TrueAUD in the Finder Wallet account would have amounted to working capital of Finder. The Court held it did not as the TrueAUD borrowed was not used in a way to suggest fundraising activities which are traditionally associated with debentures. Rather, Earn was used to market and grow the broader Finder Wallet and app product offerings and the yield Finder paid depended on that growth. On this basis, the Court held that this third element was not met. |
Are there any gaps?
We note that ASIC did not plead that the product may have been a managed investment scheme (MIS) or facility for making an investment (Investment Facility). It would have been interesting to have seen the outcome had ASIC pleaded these products given the judgement in the Block Earner Case. However, as ASIC did not plead this, there is still some uncertainty as to whether a court would have held that the Earn product was an MIS or Investment Facility.
Impact of proposed reforms
A new regulatory framework for digital asset service providers is currently under consultation, following the release of the Regulating Digital Asset Platforms Proposal Paper October 2023. See our Article for our submission on this proposed reform.
Debenture-like structures are not currently contemplated by this proposed reform, but Treasury is considering whether they should be included as part of the consultation process. It will be interesting to see if the outcome of this case will fast-track any regulation of debenture-like structures.
ASIC Appeal
ASIC lodged a notice of appeal on 10 April 2024 (see media release) on the basis the Judge erred in finding that the Earn product was not a debenture as:
- on the proper construction of the Terms (as defined in the Judgment), the second element was met as:
- the investor lent money to or deposited money with Finder on using the Earn product; and
- the Earn product was a single arrangement to acquire TAUD and transfer and allocate that TAUD to the Finder or it is reasonable to assume that the parties considered it to be one transaction; and
- the third element was met because the money deposited or loaned doesn’t need to be used for working capital purposes (other purposes may also meet this requirement) or, in the alternative, the TrueAUD deposited with or loaned to Finder was used as working capital.
Key Takeaways
- To ensure your customers are bound by your terms and conditions, it is critical that you provide customers with sufficient and prominent notice of those terms and conditions and you obtain the customer’s acceptance of them.
- If you want to offer or continue to offer yield products like Earn, it is important that you get comprehensive legal advice on the product structure, terms and all disclosures you make about the product to ensure that:
- The product is not a debenture in light of this case; or
- The product does not otherwise meet the definition of an MIS or Investment Facility in light of the Block Earner Case.
- It is possible that ASIC may litigate a case as a test case even where customers have not suffered any loss or the activity has ceased. It is critical that you get good advice upfront and along the way to mitigate this risk and the consequences of any case.
- There is still some uncertainty given ASIC’s recent notice of appeal. We recommend that businesses exercise caution before launching a new product and seek advice from experts before doing so.
For more information, please contact Jaime Lumsden, Michele Levine or Nicholas Pavouris.
1Para 93 of the Finder Case.
