The Regulator: Deciphering Digital Tokens

Monday, 30 April 2018


    ASIC must be focused on protecting Australian consumers while facilitating innovation across the financial services industry, writes Mark Adams.

    Cryptocurrencies are a global news story and Australia is no exception. But what are cryptocurrencies and how is the Australian Securities and Investments Commission (ASIC) engaging with this sector?

    First things first, the term cryptocurrencies encompasses a wide range of digital tokens issued on different technology platforms. Bitcoin was designed as a digital cash system — one that is not issued or backed by a central government and does not require a trusted central authority or third party to verify and record transactions. Other types of digital tokens can perform different functions. New tokens are commonly issued via initial coin offerings (ICOs).

    ICOs are not the same as initial public offerings (IPO) or crowd-sourced funding, both of which are regulated under the Corporations Act 2001 (Cth) and offer specified investor protections. Many ICOs do not offer legal rights and protections or claims to underlying assets.

    ASIC’s engagement with the cryptocurrencies sector is focused on consumer protection while facilitating innovation. We believe this aligns with the industry’s interests to build a more mature sector that can sustain longer-term public confidence.

    We are also working and sharing information with other domestic and overseas regulators as they clarify how cryptocurrency is regulated across taxation, anti-money laundering, payment systems and financial services. We are also addressing interest from consumers, investors, entities, advisors, service providers and intermediaries.

    Our resources include ASIC Information Sheet 225, which provides guidance for entities considering an ICO. This information sheet explains that the legal status of an ICO is dependent on the circumstances of the ICO, such as how it is structured and operated, as well as the rights attached to the token.

    In some cases, the ICO may be subject to the Corporations Act; in others, the ICO will be subject to the general law and the Australian consumer laws regarding the offer of services or products. This means the ICO would be subject to the prohibition against misleading or deceptive conduct, either under the Australian Securities and Investments Commission Act 2001 (Cth) or the Australian consumer laws. Australian law may apply even if the ICO is created and offered from overseas.

    The information sheet explains that where a token offered through an ICO is a financial product, it could be one of the following:

    • A managed investment scheme, where the value of the digital coins acquired is affected by the pooling of funds from contributors or they are arranged to be collectively managed.
    • An offer of shares, where the rights attached to the token are similar to those attached to a share, such as ownership of the body, voting rights or rights to participate in the profit.
    • An offer of a derivative, where the token is priced based on factors such as an underlying market or asset price, and price movements resulted in a payment obligation.
    • A non-cash payment facility, where there is an arrangement for payments to be made to a number of payees in this form.

    Moreover, platforms that enable trading in tokens that are financial products are more than likely to be financial markets.

    For consumers, ASIC has published two consumer warnings on MoneySmart about virtual currencies and ICOs, highlighting the risks they can carry for consumers.

    The warnings emphasise that consumers need to understand that investing in cryptocurrency is highly speculative and there is a high risk of losing money. For this reason, we recommend investors approach with an abundance of caution.

    ASIC is determined to see Australia’s innovative fintech and regtech sectors flourish in the right regulatory environment.

    From a broader perspective, ASIC is determined to see Australia’s innovative fintech and regtech sectors flourish in the right regulatory environment, and that means maintaining an open mind when it comes to new technologies and early-days business models.

    ASIC is a strong supporter of this emerging sector — but never at the expense of basic consumer protection and preventing investors and their funds being unfairly parted.

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