The regulation of initial coin offerings (ICOs) and digital currency worldwide continues to evolve with governments struggling to keep up with the challenges presented by the evolving nature of blockchain technology and cryptocurrencies.
We have previously written about the guidance which ASIC has published in relation to ICOs. In our previous article, we outlined that the Corporations Act will apply to an ICO where it is a share offering, managed investment scheme or derivative offering.
ASIC have now (as of 1 May 2018) updated their published Information Sheet 225 in respect of ICOs, which now also relates to crypto-currencies and digital tokens (crypto-assets). ASIC’s information sheet relating to these issues can be found here.
The updated guidance from ASIC is helpful to those operating in the crypto-asset space, because it contains additional information on a number of issues. In particular, the information sheet has been expanded in respect of the following areas.
Misleading or deceptive conduct
As is noted in Information Sheet 225, Australian legislation prohibits misleading or deceptive conduct in various circumstances, including in trade or commerce, in connection with financial services and in relation to a financial product. Each of those areas can have applicability to ICOs or crypto-assets.
In respect of ICOs and crypto-assets which are financial products, care will need to be taken to ensure that relevant conduct does not contravene provisions in the Corporations Act against misleading and deceptive conduct.
In respect of ICOs and crypto-assets which are not financial products (for example, ASIC has stated that it does not consider Bitcoin to be a financial product), similar prohibitions against misleading and deceptive conduct may apply by virtue of the Australian Consumer Law (ACL). Helpfully, ASIC have given illustrations of conduct that may be misleading or deceptive to consumers, such as:
- the use of social media to generate the appearance of a greater level of public interest in an ICO;
- undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity from an ICO or crypto-asset;
- failing to disclose adequate information about the ICO; or
- suggesting that the ICO is a regulated product and a regulator has approved the ICO if that is not the case.
As a sign that ASIC will be monitoring these issues, ASIC has also published a media release this week confirming that it has (as of 19 April 2018) received delegated powers from the Australian Competition and Consumer Commission (ACCC) to take action under the ACL relating to crypto-assets. The media release states that ASIC is now able to take action against misleading and deceptive conduct in the marketing or selling of ICOs.
Financial products
The information sheet also provides additional guidance in respect of financial products. A “financial product” is a term defined in the Corporations Act, and in turn is regulated by various provisions of that Act.
Relevantly, if an ICO or crypto-asset is a financial product, then those same provisions of the Corporations Act will apply.
ASIC has noted that, in respect of an ICO, the mere fact that the token which is issued is described as a utility token does not mean it is not a financial product. Similarly, the mere fact that a crypto-asset is described as a digital currency does not mean it is not a financial product.
It is important for businesses operating in this space to obtain professional advice (including legal advice) as to whether or not the ICO or crypto-asset may be a financial product. This involves undertaking an assessment of the nature of, and all rights and features associated with, the token. Given the regulatory environment continues to evolve in this space, it is also important to obtain professional advice on all aspects of the issue or sale of the tokens (and any changes to the design of the ICO or crypto-asset during development) rather than on discrete aspects only. If the ICO or crypto-asset is a financial product, and the issuer does not comply with the requirements of the Corporations Act, severe consequences could apply to its ongoing operations.
Financial products that reference crypto-assets
ASIC has also included a section in Information Sheet 225 relating to businesses that provide financial products which invest in crypto assets, or otherwise enable consumers to have exposure to crypto-assets.
Careful consideration should be given as to whether an entity will provide a financial service in relation to the proposed financial product. If so, the entity may require a new licence (or a licence variation) to provide a financial service involving crypto-assets.
ASIC have now stated that they consider applications for a licence (or variation to a licence) for crypto-asset related financial products are more likely to be novel applications. This means that it is more likely that ASIC’s assessment of the application will take more time than would otherwise be the case.
In addition to the above points, the updated information sheet contains important information for businesses involved in crypto-assets.
We are currently acting for entities considering ICOs and are actively advising in this space. If you need further advice about whether or not obligations under the Corporations Act or the general law might apply to an ICO or a crypto-asset, please contact our Corporate Advisory and Governance team.