In another first for the crypto industry, the Court has helpfully clarified what a non-cash payment facility is, specifically in the context of the blockchain, but the case remains instructive for both crypto and payments businesses alike. The question arose in Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 where the characterisation of a crypto token, a wallet and a blockchain (including smart contracts and the consensus mechanism) became critical to the issue of whether a financial product was provided compliantly.
In this article, we zoom in on what the Court considers is a non-cash payment facility, how you determine this, and what this means for your business.
Background
ASIC alleged that BPS Financial Pty Ltd t/a Qoin (BPS) carried on a financial services business without holding an Australia financial services licence (AFSL) in relation to its provision of the Qoin Facility, which ASIC argued was comprised of the following:
- Qoin Token: This is a unit of measurement that is fungible, could be reflected in a Qoin Wallet and was transferrable from a Qoin Wallet to other Qoin Wallets via the Qoin Blockchain. Where a Qoin Token was transferred, any such transfer was reflected in a decrease to the balance of one Qoin Wallet and an increase in the balance of another Qoin Wallet;
- Qoin Blockchain: This is a decentralised distributed ledger that stores a record of all Qoin token transactions in blocks that are validated by a consensus mechanism operated by nodes. Smart contracts (which form part of the building blocks or rules of the Qoin Blockchain) are algorithmic self-executing codes that execute transactions on the blockchain, which are included in the blocks verified as part of the consensus mechanism;
- Qoin Wallet: This is a crypto wallet that has a public / private key pair that enables users to pay and receive Qoin Tokens and review their Qoin Token balance. The Qoin Wallet forms part of the Qoin Wallet app that users must download from app stores. Users must register for the Qoin Wallet and complete the prescribed KYC process before accessing Qoin Wallet functionality;
- The ability to acquire Qoin Tokens directly from BPS or any of its associated entities; and
- The ability of Qoin merchants to register as a participating merchant in the Qoin Facility.
ASIC argued that these elements of the Qoin Facility constituted a single facility which had been implemented by BPS for the substantial purpose of enabling users to make payments for goods and services.
Finding
The Court disagreed with ASIC and held that the non-cash payment facility was the Qoin Wallet only. The Court came to this conclusion having regard to the following factors:
- The fact that a financial product’s functionality requires integration with some other product, facility or thing does not of itself cause that other product, facility or thing to be a financial product i.e. the fact that a wallet needs to integrate or communicate with a blockchain to actually process the payment does not of itself cause the blockchain to be a non-cash payment facility. Implied in this reasoning is that when assessing whether something is a non-cash payment facility, it is critical to distinguish between the payment product and payment infrastructure / rails; and
- When assessing what is a financial product, you need to consider what is the thing that creates a customer relationship that enables a ‘dealing’ activity i.e. what is the product, facility or thing that enables customers to make a payment or receive a payment. As part of this assessment, the Court confirmed that it is necessary to distinguish between:
- the unit of measure (which may be a token) which may be used to make or receive a payment;
- third-party systems that may be required to process payments, but which don’t have any relationship with or direct nexus with the customer; and
- products that do have a direct customer relationship,
This is because it is the thing that gives rise to the direct nexus between the customer and the dealing activity that is the financial product.
What does this mean for you?
Any business that provides any wallet functionality that enables any transfer of value (notional or actual) will need to consider whether it may be providing a non-cash payment facility and, if so, whether it needs an AFSL or can access any available exemptions. This is no simple task and you should reach out to the experts!
If the proposed payment reforms become law (see this article for more information), in our view, the distinction between payment product and payment infrastructure will become less important, but still relevant. This is because the payment reforms are proposing to regulate payment technology and enablement services that may capture payment infrastructure or rails (that are not themselves payment systems). While payment infrastructure may be regulated in the future, we suspect that the level or extent of the regulation will be lower given that there is no direct customer relationship.
Please reach out to Jaime Lumsden and Michele Levine if you have any questions or would like to learn more
