This week, Web3 Ventures Pty Ltd (trading as Block Earner) filed a cross-appeal to the Federal Court decisions which found Block Earner previously offered a unlicensed financial product but absolved it from civil penalties.
Block Earner’s cross-appeal appears prompted as a result of the Australian Securities and Investments Commission (ASIC)'s recent appeal to the Federal Court's decision relieving Block Earner of a penalty for not holding an Australian Financial Services Licence while offering their Earner product. This escalation of court actions marks the latest round of dispute over whether a yield bearing "Earner" product (a yield generating product) offered by Block Earner was a regulated financial product and if so, whether Block Earner should bear civil liabilities for providing such product.
A brief summary of the history of judicial decisions and the parties' appeals is set out below.
Round 1
ASIC alleged that between March and November 2022, Block Earner had offered two products that were financial products.
The first product was "Access", through which customers could send funds through to Aave and Compound, prominent DeFi lending protocols which compensate lenders for depositing cryptocurrency. The second product was "Earner" , which paid users interest on crypto and was framed as a loan. Block Earner promptly removed the Earner product in response to ASIC’s concerns, but was sued nonetheless.
In the primary judgement delivered on 9 February 2024, Jackman J of the Federal Court of Australia found that Access was not a financial product, but Earner satisfies the definition of a managed investment scheme and an investment facility, hence a financial product.
ASIC got a partial win in round 1.
Round 2
Despite finding Block Earner offered a financial product, in the penalty hearing on 4 June 2024 Jackman J relieved Block Eaner from civil penalties arising from offering the unlicensed financial product, finding that it had acted honestly and fairly in the circumstance.
His Honour found that Block Earner had not been "careless or imprudent" to any degree as it made a genuine attempt to comply with the requirements of the Corporations Act, despite ASIC's contentions to the contrary.
His Honour also accepted that Block Earner's active participation in policy discussions with key industry participants and regulators concerning crypto-asset products supported a finding that Block Earner had sought to conduct its business in a lawful manner.
The Court noted that Block Earner had formed an "unchallenged view", after obtaining legal advice from a law firm, that there was no identified risk that the Earner product would breach any laws or regulations, despite ASIC's contention that there was no evidence that legal advice prepared for Block Earner was actually relied upon by it or specifically drafted in relation to its Earner product.
In particular, His Honour accepted a complaint by Block Earner that a media release published by ASIC the same day as the judgment, titled "Court finds Block Earner crypto product needs financial services licence", was unfair and misleading for reasons including that Block Earner did not "need" an AFSL as at 9 February 2024 as the Earner product had been withdrawn. ASIC has since changed the title of the media release to use the past tense.
Finally, his Honour ordered the parties to bear their own costs up to the date of the decision in February. ASIC was ordered to pay Block Earner's costs after 9 February (including for the penalty hearing).
Block Earner has recouped grounds in round 2 and ASIC has suffered great loss by not being able to get any penalty or recover its litigation costs.
Round 3
On 17 June 2024, ASIC lodged an appeal outlining three grounds, which contests both the factual findings and legal analyses of Jackman J's 4 June 2024 decision relieving Block Earner from a penalty. ASIC is seeking to overturn nearly all of Justice Jackman's penalty decision, other than the order that the parties bear their own costs for the main proceedings, meaning ASIC has accepted that they cannot recover any costs they incurred in suing Block Earner.
ASIC is still pressing for the Full Federal Court to impose "a pecuniary penalty in the amount of $350,000 or such other amount the Court sees fit". This was the amount originally sought by ASIC and rejected by Justice Jackson.
It was not entirely surprising that Block Earner dealt back the cross-appeal to guard itself against ASIC's offensive moves. Block Eaner is arguing that the Eaner product is not a financial product at all and ASIC should bears Block Eaner's costs.
The outcome for round 3 will be closely watched.
Conclusion
ASIC's appeal has caused concern in the Australian crypto-community as it signals an aggressive regulation by enforcement approach in the absence of clear guidance or a pathway to compliance.
Beneath the legal matters arising from this appeal lies a far more important macro issue, that regulation, sought by the industry for years, is finally starting to be formed, and a regulation by enforcement remains a very inefficient means to make rules, as has been seen in the USA, and often court decisions can raise more questions than they answer.
In a regulatory environment that has been judicially recognised as unclear and "tangled mess", the question of how precious public funds are spent and what outcomes are being achieved from that spending is an important question that needs to be considered.
Setting clear rules of the road and a viable and affordable pathway for licensing for crypto-asset products, to the extent it is required to manage real risks (principally custody), would appear an outcome more consistent with fair rule of law, better reached by consultation and rule/law-making by parliament.
Written by J Huang and M Bacina
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