Crypto court ruling: "Scope" of financial products, authorised representative exemptions and misleading or deceptive conduct

Earlier this month, the Federal Court of Australia handed down its judgment in Australian Securities and Investments Commission (ASIC) v BPS Financial Pty Ltd (BPS) [2024] FCA 457, concerning the cryptocurrency and related payment system provided by BPS. The Court found that BPS unlawfully carried on a financial services business without holding an Australian Financial Services Licence (AFSL) and made false and misleading representations connected to the supply or use of a financial product.

Background

BPS created and offered to the public a system for making non-cash payments using the Qoin cryptocurrency. Offered since January 2020, Qoin was provided through a "Qoin Facility" (defined below) with multiple elements. The key elements included:

• the Qoin Wallet, which each user activated through the Qoin Wallet app, using a specific program to send and receive requests to transmit Qoin in payment for goods and services;
• the Qoin Blockchain, which recorded and encrypted Qoin transactions; and
• Qoin, a notional unit of exchange in transactions processed through the Qoin Wallet and recorded on the Qoin blockchain, which users could acquire through transactions with other users or by purchasing from BPS, (collectively, the Qoin Facility).

While offering Qoin, BPS also published statements on the Qoin website and in a white paper (a document typically used to summarise the key features of a cryptocurrency project) which represented that Qoin:

• could be exchanged for fiat currency or other cryptocurrencies through independent exchanges (Trade Representation);
• could be exchanged for goods and services with a growing number of merchants (Merchant Growth Representation);
• was officially approved and registered under a record kept by the government (Approval and Registration Representation); and
• fully complied with Australian financial services laws, including BPS's maintenance of all required financial services licences (Compliance Representation).

BPS did not maintain its own AFSL at any time and instead sought to rely on the exemption under ss 911A(2) of the Corporations Act 2001 (Cth) by purporting to operate the Qoin Facility under the authority of AFSLs held by two unrelated licence holders with whom it had entered into Authorised Representative Agreements (the AR Agreements), and whose licences covered the provision of advice in relation to, and dealing in, non-cash payment facilities.

Legal issues considered by the Court

ASIC's case

ASIC contended that all elements of the Qoin Facility amounted to a single financial product, on the basis that all elements of the Qoin Facility comprised a single arrangement under which non-cash payments were made.

ASIC also sought to argue that the specific terms of the AR Agreements did not exempt BPS from requiring an AFSL as:

• BPS did not provide financial services on behalf of the licence holders in the capacity of an agent, according to the terms of the AR Agreements; and
• BPS issued and provided financial services on its own behalf in relation to Qoin, not on behalf of the licence holders.

ASIC also argued that the Trade Representation, Merchant Growth Representation, Approval and Registration Representation and Compliance Representation were false and misleading.

BPS's case

BPS submitted that the Qoin Wallet alone was the financial product, because systems that merely facilitated non-cash payments (such as the Qoin Wallet app) are not necessarily encapsulated in the financial product.

BPS argued that the authorised representative exemption did apply, because it was authorised under the AR Agreements to provide financial services on behalf of appropriately-licensed AFSL holders and because it did, in fact, provide these services on behalf of the two licence holders.

Finally, BPS argued that it did not mislead or make misrepresentations to consumers by the Trade Representation, Merchant Growth Representation, Approval and Registration Representation and Compliance Representation, as it had reasonable grounds to make these statements.

Court ruling

Justice Downes agreed with BPS insofar as the relevant non-cash payment facility (and therefore, financial product) was the Qoin Wallet, because it was the mechanism or "thing" that allowed consumers to make the non-cash payment. In coming to this decision, analogies were drawn with other existing financial products which integrated separate third-party systems, which her Honour determined were not intended to be captured for the purposes of Chapter 7 of the Corporations Act.

Whilst acknowledging that BPS was an authorised representative under each of the AR Agreements (in contrast with ASIC's submissions), Justice Downes found that BPS could not rely on the authorisations under the AR Agreements with one licence holder, because the express terms of those agreements did not provide for BPS to issue or give financial advice concerning the Qoin Wallet. As such, BPS, by engaging in such activities, had contravened the licensing requirements of the Corporations Act.

The terms of the AR Agreement with the other licence holder differed by authorising BPS's issue of the Qoin Wallet. As such, BPS was entitled to rely on the authorised representative exemption for the term of that agreement.

In addition, the Court also found that BPS contravened the consumer protection provisions of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by making the Trade Representation, Merchant Growth Representation, and Approval and Registration Representation without reasonable grounds for the reasons below.

• Trade Representation - from 21 November 2021 to at least July 2023, there was no reason for BPS to believe there would be future independent exchanges available to convert Qoin to fiat currency or other crypto assets.
• Merchant Growth Representation - there was consistent evidence of a sustained decline in Qoin transactions and therefore there were no reasonable grounds to represent that the number of Qoin Merchants would increase in the future.
• Compliance Representation - the Qoin Wallet had not been "registered" or "approved" by the relevant authority, being ASIC, and the use of such wording would likely lead an ordinary or reasonable member of the relevant audience to form the incorrect belief that there had been appropriate registration. The assertion of such registration also falsely imparted a sense that the financial product had an augmented degree of reliability. However, ASIC failed to establish that the Compliance Representation was a breach of the ASIC Act, as BPS presented this representation as an opinion, and reasonably believed that it fully complied with Australian financial services laws after receiving advice to that effect.

Implications of the case

There are three key outcomes from this case:

1. The scope of what is a financial product when it comes to a cryptocurrency ecosystem does not extend to peripheral systems or features that support or enable non-cash payments (and by extension, the financial service) to occur. This is an important consideration for digital asset project operators to help provide clarity on whether ASIC regulation extends to an underlying blockchain technology, which makes an ecosystem possible, or whether it is restricted to the "traded" tokens itself.

2. When seeking to rely on the authorised representative exemption under the Corporations Act, the parties should ensure that the terms of their authorised representative agreement are carefully drafted and expressly set out the services which they authorise, so that it accurately reflects the conduct in which the parties intend to engage.

3. Digital asset operators must take particular care to avoid making potentially misleading or deceptive representations in relation to their financial services business and should have them settled by legal advisers experienced in this area.
   

This case represents the first time the courts have considered non-cash payment facilities in the crypto-asset context and represents ASIC's increasing scrutiny and prosecution of crypto-asset projects.

Lander & Rogers has extensive experience in providing legal advice on crypto assets. Please contact us if you require assistance with understanding the impact of financial services and other laws on your projects.