ASIC Updates on ICOs and crypto-assets
In the 12 months since ASIC’s last update to INFO 225, Australian regulation around crypto assets has failed to develop in any notable manner. While other jurisdictions such as Singapore have continued to communicate their positions on digital asset securities, limited updates on local regulation have been provided until now.
While ASIC’s position on the regulation of ICOs and digital assets under the Corporations Act 2001 (Cth) (Corporations Act) remains unchanged, the guidance has been updated to provide further detail in relation to:
ASIC has also updated its guidance to provide helpful graphics which may assist issuers of crypto-graphic tokens to determine when certain obligations under the Corporations Act or the ASIC Act 2001 (Cth) may apply to them or their token. While the guidance remains largely the same as ASIC’s previous iterations of INFO 225, ASIC now acknowledges the role that miners and transaction processors play in the ICO process. It states that laws applying to clearing and settlement facilities may be involved where miners and transaction processors are part of a clearing and settlement process for tokens. ASIC also makes it clear for wallet providers and custody service providers that, if tokens stored by your business are financial products, it will be necessary to hold appropriate custodial and depositary authorisations.
Guidance in INFO 225 has considerably increased in relation to MIS. This is consistent with the experience of ASIC to date that many ICOs may be interests in managed investment schemes. In the updated INFO 225, ASIC notes that, where a crypto-asset issuer is framing the entitlements received by contributors as a receipt for purchase in an ICO, and the value of the crypto-asset is affected by pooled funds from contributors or the use of those funds under the arrangement, then the ICO is likely to be an MIS. ASIC has provided detailed explanations in INFO 225 as to retail and wholesale MIS offerings and Australia’s legal requirements for both, as well as a new graphic which may assist crypto-asset issuers in determining whether an ICO is an MIS.
Additionally, ASIC has firmly stated that issuers of interests in an MIS should not be relying on a corporate authorised representative (CAR) appointment from another Australian financial services (AFS) licensee to issue interests in the MIS. Any such issuer would not be acting on behalf of an AFS licensee but would be issuing interests in the scheme as trustee in its own right.
In addition to any AFS licensing which may be required for the operation of an MIS, ASIC has also noted that financial products linked to, or referencing, crypto-assets may require a new AFS licence or licence variation. This is because entities will be providing a financial service in relation to the financial product and may require a new product authorisation.
Applications for a new AFS licence (or a licence variation) relating to crypto-asset-related financial products are more likely to be novel applications (which may take more time). ASIC expects that market operators will play a gatekeeper role in ensuring that products listed are suitable for listing and trade.
In light of other international regulators (such as Switzerland’s Financial Market Supervisory Authority (FINMA) and the Monetary Authority of Singapore who have developed and refined their stance in relation to sales of crypto-tokens), ASIC has addressed the transferability of ICO regulations from other jurisdictions to Australia. While other international regulators have provided comprehensive guidance in relation to ICOs which may be helpful to token issuers, ASIC states that such guidance does not automatically translate to the Australian context. Specifically, ASIC notes that the definition of financial products in Australia is often broader than in other jurisdictions and that while certain crypto-assets may fall outside of the regulatory scope in other jurisdictions, they may be captured under Australia’s broader definition.
Lastly, ASIC has taken the opportunity in INFO 225 to warn those in the digital assets sector that if they do not consider that the relevant crypto-asset is a financial product, “Entities should be prepared to justify a conclusion that their ICO does not involve a regulated financial product”. ASIC expects that entities will comply with all relevant Australian laws and as part of this, entities should ensure they seek professional advice (including legal advice) before undertaking any offering or marketing in connection with a future offer.
Further, ASIC states that “Entities are expected to know who their investors are to justify a conclusion that exemptions under the Corporations Act for ‘wholesale’ or ‘sophisticated’ investors versus retail investors apply to the offering.” ASIC is expecting token issuers to be familiar enough with Australia’s regulatory environment to know the varying levels of disclosure required for different investors, and that they know their investors well enough to justify their actions in the event they wish to take advantage of reduced disclosure provisions under the Corporations Act.
This approach reflects the regulator’s prior experiences with digital assets entities who have failed to justify their non-compliance with corporations and financial services laws when queried about the characterisation of their financial products. It continues to demonstrate ASIC’s conservative stance in relation to digital assets and the uncertainty of the existing regulations.
While the update to INFO 225 is long overdue and demonstrates that ASIC continues to dedicate resources to keep abreast of ICOs and fundraising efforts involving crypto-assets, those in the digital assets sector may be left underwhelmed by the update. Though there may be some novelty in the updated INFO 225, there is still a way to go for Australia to have clear guidance on ICO governance under the Corporations Act.
We will continue to wait for the Treasury to publicly respond to the submissions put forward in response to its consultation on initial coin offerings which closed in February 2019.
If you need advice about the obligations under the Corporations Act or the general law that might apply to an ICO or a crypto-asset, please contact a member of HopgoodGanim Lawyers’ Digital Assets team.