Australian Regulator Sues Crypto Firm For Offering Yield-Bearing Products

November 29, 2022
An Australian watchdog is pursuing a local crypto firm for allegedly violating federal financial service laws. This first-of-its-kind investigation in Australia mirrors cases brought in the US, including one being pursued by Texas regulators against FTX.

An Australian watchdog is pursuing a local crypto firm for allegedly violating federal financial service laws. This first-of-its-kind investigation in Australia mirrors cases brought in the US, including one being pursued by Texas regulators against FTX.

The Australian Securities and Investments Commission (ASIC) has initiated civil penalty proceedings against Block Earner, a Sydney-based crypto firm, alleging that it offered unlicensed financial services and unregistered investment management services.

ASIC’s complaint centres on Block Earner’s offering of a range of fixed-yield-bearing products that are based on crypto-assets.

Referred collectively in ASIC’s complaint as "Earner Products", they include USD Earner based on Circle’s USDC stablecoin, Gold Earner based on Paxos Gold (a gold-backed crypto-asset) and Crypto Earner based on bitcoin and ethereum.

Block Earner began offering these products in March 2022, but stopped marketing them in November 2022 after being notified by ASIC of its concerns.

When the Earner Products were still active, the fixed yield rates offered were 7 percent annualised percentage yield (APY) for USD Earner, and 4 percent APY for Gold Earner and Crypto Earner.

ASIC alleges that these were financial products and should have been licensed, as they meet the definition of a managed investment scheme, a derivative or a facility through which to make a financial investment.

“We are concerned that Block Earner offered financial products without appropriate registration or an Australian Financial Services (AFS) licence, leaving consumers without important protections,” said Sarah Court, deputy chair at ASIC.

“Simply because a product hinges on a crypto-asset, does not mean it falls outside financial services law.”

Terms and conditions

According to Block Earner’s Terms of Use, when a customer invests in an Earner Product, they are effectively “lending” money to Block Earner on the agreement that it will be paid back with interest.

Once in possession of user funds deposited via an Earner Product, Block Earner would then lend the user’s crypto-assets to a third party on an unsecured basis.

This would be based on a pre-existing commercial arrangement, for which Block Earner received a fixed yield that would be used to pay back the customer.

As noted by ASIC: “Users also agreed to grant Block Earner all rights and title to those crypto-assets, for Block Earner to use at its sole discretion during the term of the ‘loan’.”

Under Australia’s Corporations Act, a managed investment scheme is defined much like a security under the US’ Howey Test and the 1933 Securities Act.

It requires that multiple investors contribute money or “money’s worth”, such as crypto, in a common enterprise with the expectation of profit.

Moreover, it requires that investors do not have day-to-day control over the operation of the investment scheme.

ASIC believes that the Earner Products meet both these definitions. It also believes the Earner Products meet the definition of a derivative, as investors’ AUD balance would vary based on crypto-asset prices, and withdrawals from the scheme would be converted back into AUD.

From March to August 2022, ASIC said that A$1.5m was owed by Block Earner to users of the Earner Products.

“The requirements of the Corporations Act which ASIC contends have been contravened by Block Earner are directed at the protection of investors in the context of financial Investments,” said ASIC.

“By Block Earner’s failure to provide those protections, consumers were exposed to risk and made an uninformed (or inadequately informed) or unsuitable investment, and ultimately exposed to loss in a manner inconsistent with the provisions of the Corporations Act.”

In response to Block Earner’s conduct, ASIC is seeking declarations, injunctions and pecuniary penalties from Australia’s Federal Court.

Crackdown on yield-bearing products spreads

The case against Block Earner marks the first time that ASIC has pursued a crypto-asset firm for alleged financial service violations based on yield-bearing product offerings.

However, in the US, there has already been one complaint upheld against a major crypto firm, in addition to multiple active cases both federally and by state regulators.

Last month, as reported by VIXIO, the Texas State Securities Board (TSSB) revealed that it has opened an investigation into FTX for allegedly offering unregistered securities through its yield-bearing crypto products.

Although this investigation has since been overshadowed by allegations of fraud in the wake of FTX’s bankruptcy filing this month, it remains active, and is being led by a TSSB enforcement director who personally used FTX’s yield-bearing products as part of his investigation.

Earlier this year, in February, the Securities and Exchange Commission (SEC) upheld a complaint against crypto lender BlockFi for unregistered securities violations, leading to $100m in penalty fines.

Half of the penalties paid by BlockFi went to the SEC, and the other half went to 32 states to settle similar complaints against the company.

Additionally, in September 2021, four of those states issued cease and desist orders against Celsius, another crypto lending platform, to prevent it from offering yield-bearing products in those jurisdictions.

In light of Celsius’ bankruptcy filing in July this year, that intervention by regulators in Texas, Alabama, Kentucky and New Jersey now appears to have been vindicated.

As of November 28), BlockFi had also filed for bankruptcy, claiming it cannot fund its operations without financial support from FTX.

Finally, in September last year, Coinbase announced that it has received a Wells from the SEC, a notice explaining that the SEC intends to sue Coinbase, for its yield-bearing product offering known as Lend.

However, Coinbase argues that its Lend programme does not meet the definition of a security as it is not an “investment contract” or a note.

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