An intriguing ruling by an Australian federal court has brought about a subtle differentiation in the treatment of crypto-yield products. The court stated that while products that guarantee a managed yield will require a financial services license, decentralized finance (DeFi) products that operate on a pass-through basis may not be subject to the same requirement.
The ruling, issued by federal court judge Ian Jackson on February 9, penalized Block Earner for offering its “Earner” product without an Australian Financial Services License (AFSL) in 2022. The product provided yield for loans denominated in USD Coin (USDC), Bitcoin (BTC), Ether (ETH), and PAX Gold (PAXG). However, the court did not apply the same requirement to Block Earner’s DeFi “Access” product, as it did not operate as a managed investment scheme.
Block Earner commented on the court’s decision, stating that it carries important implications for both the company and the wider crypto industry in Australia. It provides guidance on the application of Australian financial services laws to crypto-related products and services.
The case was initiated by the Australian Securities and Investment Commission (ASIC), which alleged that both Block Earner’s Access and Earner products violated corporation laws. In an interview, Piper Alderman digital asset lawyer Michael Bacina clarified that Access served as a pass-through to DeFi, while the Earner product involved a representation that users’ crypto would generate a return. The Access product, on the other hand, is reliant on Aave or Compound and does not require Block Earner to generate a return.
Bacina emphasized that the marketing of these products is crucial in determining their regulatory requirements. The Earner product operated from March 17 to November 16, 2022, but Block Earner confirmed that it terminated the product before the legal proceedings began and that the court’s findings do not impact its current offerings.
Block Earner stated that the dismissal of ASIC’s case against Access is a significant development for the coexistence of DeFi with Australia’s regulatory frameworks, paving the way for further development and adoption of DeFi solutions.
Aaron Lane, a senior research fellow at the Royal Melbourne Institute of Technology’s Blockchain Innovation Hub, believes that if the Australian Treasury’s proposed legislation for the crypto sector is passed, it is likely to impose licensing conditions on Block Earner.
ASIC will now seek orders from the court to impose monetary penalties. The case has been scheduled for a case management hearing on March 1, 2024.
ASIC welcomed the court’s decision, viewing it as a step forward in protecting consumers from digital asset products. The regulator urged firms offering cryptocurrency products to carefully consider whether their offerings constitute financial products and to seek licensing if necessary.
In conclusion, the ruling by the Australian federal court has provided important guidance on the regulation of crypto-yield products, distinguishing between those that require a financial services license and those that do not. The decision has implications for Block Earner and the broader crypto industry in Australia, and it may influence the upcoming legislation proposed by the Australian Treasury.