2022 saw the collapse of many cryptocurrency platforms, leaving many customers at risk of losing everything. The spectacular collapse of FTX left at least 30,000 Australians at the mercy of the liquidation process to see if they would recover anything. According to media reports, individual Australian customers were left with losses up to $1m after FTX put their Australian companies into voluntary administration in November 2022.
Clients are asking: Will we get our money back? What can we do to get our money back? What does Australian legislation say about crypto?
According to media reports, while Australian administrators are trying to get some funds back to investors, many customers will have to deal with US administrators.
Many people think crypto exchanges are like stock exchanges and, therefore, safe. Unfortunately, they are very different. For one, stock exchanges are highly regulated; crypto exchanges are not so much.
Many think crypto exchanges are safe and well-regulated if they have an Australian financial services licence (AFSL) at the time. However, that licence may be acquired by taking over a company that already has one.
This article will examine crypto and the current regulations applicable to crypto in Australia.
For more on company insolvency in general, see our previous article here.
What are crypto-assets?
The Australian Moneysmart website explains crypto as follows:
"Crypto-assets (crypto) mean digital assets including cryptocurrencies, coins or tokens. They digitally represent your ownership of a value or rights to something. They may or may not be backed by physical assets.
Crypto is a high-risk investment. The value of crypto is very volatile, often fluctuating by huge amounts within a short period."
In explaining why crypto is high-risk, Moneysmart mentions that the platform where you buy and sell crypto may not be regulated by ASIC. So, you may not be protected if the platform fails or is hacked.
Where does this leave clients?
What are the current regulatory requirements around crypto in Australia?
In October 2021, ASIC, the Australian Securities and Investments Commission, issued INFO 225 to provide some guidance on how the Australian financial services regime applies to crypto-assets. In 2022, Treasury started a token mapping exercise, releasing a "token mapping framework" in February this year. In March this year, Senator Bragg introduced a private bill proposing standards for cryptocurrency in Australia - The Digital Assets (Market Regulation) Bill 2023.
Despite all these efforts, Australia (and most of the world) still does not have specific cryptocurrency laws, and it seems we will have to wait till 2024-2025 for specific crypto legislation.
However, there are some areas where crypto is covered by existing laws, which may give consumers a remedy.
Crypto and the Corporations Act 2001
ASIC's INFO 225 on crypto-assets sets out the obligations under the Corporations Act.
Currently, crypto-assets that are or form part of an investment product that is a "financial product" falls under the Corporations Act 2001 - meaning a trading platform or crypto-asset exchange that issues crypto-assets that fall within the definition of a "financial product" in Australia must hold an AFSL or apply for an exemption.
Crypto as a financial product
The general definition of a financial product under sec 763A of the Act states that a "financial product" is a facility through which a person does any of the following:
• makes a financial investment;
• manages financial risk; or
• makes non-cash payments.
Section 764A includes specific things that are financial products, for example, managed investment schemes.
Section 911A of the Corporations Act provides that a person who carries on a "financial services business" in Australia must hold an AFS licence.
A "financial services business" is defined as the business of providing financial services, which includes providing financial product advice, dealing in a financial product, operating a registered managed investment scheme, making a market for a financial product, and providing custodial or depository services.
The same applies to crypto-asset intermediaries - if you are giving advice, dealing, providing insurance, or providing other intermediary services for crypto-assets that are financial products, you need an AFS licence under the Corporations Act.
Crypto schemes and managed investment schemes
If your crypto is invested in a scheme that falls within the definition of a "managed investment scheme" under the Corporations Act, the Act will apply.
Section 9 of the Act explains a managed investment scheme as a scheme with the following features:
• People contribute money (or money's worth) as consideration to acquire rights (interests) to the benefits produced by the scheme;
• Any contributions made to the scheme are pooled or used in a common enterprise to produce financial benefits or benefits consisting of rights or interests in the scheme property for the people (members) who hold interests in the scheme; and
• The members do not have day-to-day control over the operation of the scheme.
Unfortunately, INFO 225 does not give us definitive guidance on all aspects of crypto. Since 2021, the crypto space has evolved and is constantly changing. For now, if your crypto-asset can be classified as a financial product, it falls under the Corporations Act.
Any platform that enables consumers to buy or sell crypto must hold an Australian market licence.
Implications for crypto falling under the Corporations Act
If your crypto-assets are a financial product under the Act, it implies certain obligations and requirements, including:
Prohibitions on:
• misleading and deceptive conduct or unconscionable conduct; and
• "hawking" or pressure selling.
• Requirements as to disclosure about the features and characteristics of financial products before sale;
• Design and distribution obligations; and
• Requirements for those financial products traded on financial markets.
See our recent article on how the court deals with breaching disclosure laws and the GetSwift litigation.
The future of crypto buying in Australia
If you are considering buying crypto, ask yourself these questions:
• Is the product considered a financial product under the Corporations Act?
• If so, does the platform have a properly acquired AFSL?
• Does it comply with the Corporations Act requirements such as disclosure, registration, licensing, and conduct obligations?
• If the sale involves an "offer", are they complying with Australian marketing regulations?
• What other laws apply to crypto?
Besides the licensing and other requirements in the Corporations Act, crypto transactions can also fall under the following laws:
• The National Credit Consumer Protection Act (NCCP Act) 2009
Cryptocurrency lending activities are on the rise - if it falls within the scope of the NCCP Act, the crypto lending entity must have a credit licence.
• The Electronic Transactions Act (ETA) 1999
Some cryptocurrency networks have implemented self-executing ("smart") contracts. They are permitted under the ETA but must meet all the elements of a traditional legal contract under Australian laws.
• The Competition and Consumer Act 2010 and the unfair contract terms regime
Anyone offering services or products to Australian consumers is subject to Australian consumer laws. It includes protection against misleading or deceptive conduct and unfair contract terms. Crypto marketing may not contain any false or misleading information. ASIC includes the following as misleading conduct:
• creating an appearance of greater levels of public interest;
• failing to disclose relevant information about a sale; and
• "suggesting" that the sale is regulated, when it is not.
Failure to comply with consumer law can lead to monetary penalties, injunctions, and compensation.
For changes to the legislation concerning "unfair contract terms", please see our previous article here.
• The Anti-Money Laundering and Counter-Terrorism Financing ACT 2006
Digital currency exchanges must register with AUSTRAC under the anti-money laundering regime. As a digital currency exchange, crypto exchanges must register with AUSTRAC and comply with reporting obligations, including "know your customer" requirements.
The Australian government is currently consulting with all stakeholders, and we will hopefully see significant developments in the crypto regulatory space soon.
Until then, if you have been the victim of a collapsed scheme or suffered losses as a crypto trader on an exchange operating in Australia, you should seek professional advice as soon as possible to consider your options under the current financial services laws.
A financial services lawyer will assess whether you have protection under one of the existing laws applicable to cryptocurrency and recommend you take the necessary steps to protect your rights.