The Australian Securities and Investments Commission (ASIC) previously alleged that Block Earner, a Web3 Ventures Pty Ltd venture, had operated without a financial license, offering unlicensed financial services during a period from March to November 2022.
Australia’s Federal Court’s Full Court allowed Block Earner’s appeal. The digital currency exchange and asset service provider – currently registered with the Australian Transaction Reports and Analysis Centre (AUSTRAC) – has earned a major win against Australia’s top investment regulatory body. It is a major story in cryptocurrency news because it is a landmark development in the industry.
Background to the Case
ASIC alleged that between March and November 2022, Block Earner was offering a pair of financial products despite not having a financial license. Those products include Earner, a fixed-yield product featuring crypto-related assets, and Access, a variable-yield product of the same ilk.
The Securities Commission alleges that Block Earner, by offering the aforementioned Earner product, was violating Chapter 7 of the Corporations Act by offering financial services without having the necessary license. As a result, ASIC sought both pecuniary penalties and injunctive relief.
The Federal Court, in February 2024, agreed with ASIC regarding the Earner product as a financial product. The court ruled that it fell under managed investment schemes (MIS), financial investment, and even derivatives. Access, however, was not found by the court to be a financial product.
Block Earner posted the ruling on its own website. In June 2024, the Court excused Block Earner from having to face any penalty. This is based on the company obtaining legal advice, the novelty of the potential legal issues at hand, and total cooperation from the company.
Earner Product
At the heart of the issue is the Earner product. The Full Federal Court of Australia ruled that the Earner product was not, in fact, an MIS. Their ruling is that Earner didn’t satisfy certain key elements already outlined in section 9 of the aforementioned Corporations Act.
In the judgment, it was emphasized that there must be some kind of connection between the user’s acquisition of rights to specific benefits and the contribution it makes to the scheme.
The Court ruled that the users of Block Earner had their rights defined through applicable terms. Moreover, they were limited to repayment of both interest on loans as well as principal. Further, users didn’t acquire any rights to potential benefits produced by Block Earner from loan proceeds. The Court ruled that any returns from Block Earner generated by loan proceeds were distinguished from statutory concepts of customers receiving those rights to benefit from the scheme.
In the end, Earner was deemed to not be a financial investment product. The ruling noted that ASIC failed cite as evidence their understanding of the arrangement between Block Earner and investors.
It was also ruled by the Full Federal Court that Earner is not a derivative, either. The most important takeaway is that the Earner and Access products could not be considered in arrangement with the Block Earner exchange.
Because of that, it wasn’t necessary for the Full Federal Court to consider whether these products were exempt from being a derivative. This comes on the basis that it was a contract or credit facility for provision of future services.
Landmark Decision
In the end, the Full Court of the Australian Federal Court not only allowed Block Earner’s appeal but dismissed the appeal of ASIC. In the process, ASIC has been ordered to pay for all costs associated with the proceedings, which includes the appeals themselves.
The decision ultimately centered around Block Earner’s main product, Earner, not being a financial product. Because of that, there was no previous requirement on the part Block Earner to possess an Australian financial services license (ASFL).
In the wake of the finding, the Full Court deemed that there was no ruling needed on the decision made by the Federal Court to relieve Block Earner from any penalties or liabilities.
Hall & Wilcox fintech and blockchain lead John Bassilios, as well as lawyer Ali Alansari, spoke on the issue in an article titled “Crypto clarity: Court rules Block Earner did not breach financial services laws.” This is what they had to say:
“The Court’s decision significantly narrows the scope of when fixed-yield crypto offerings might be considered financial products. It confirms that what matters most is the legal structure and obligations created under a product – not its economic function or how it might appear to operate.”
“This is welcome news for crypto platforms, DeFi projects and fintech’s offering yield-generating products without an ASFL,” continued Alansari and Bassilios. “The judgement provides more clarity and may encourage businesses to revisit product offerings that were previously paused due to regulatory risk.”
In a media release, ASIC noted that it is considering the decision of the Full Court.
Relief From Penalties
The allowance of Block Earner’s cross-appeal, while also dismissing ASIC’s appeal, was an important opportunity on behalf of the Full Federal Court. This opportunity allowed for important observations to be made when it comes to penalty relief, something that litigants should take note of.
The Full Federal Court ruled that Block Earner is fully relieved of any liability to pay pecuniary penalty. Part of this ruling is because the primary judge involved accepted that it had previously obtained legal advice as it relates to the Earner product.
What is interesting about this case is that both the evidentiary and procedural circumstances led the judge to come to the conclusion that legal advice was obtained by Block Earner. It is important, however, to clarify any principles that would apply here, and the Full Federal Court had a cautionary take.
The Court stated that, should a defendant seek to rely on that legal advice as a mitigating factor, they have to prove that advice was actually received. The Court states that a defendant should be able to prove that relevant legal advice was provided in order to appeal liability from pecuniary penalties.
Final Word
At the very least, this is a major legal victory on behalf of Block Earner. It also shows the resistance of the entire cryptocurrency industry to a potential regulatory border being created by exploratory litigation. It also provides a level of clarification when it comes to legal principles and how they apply to certain investment products.
This ruling comes at significant financial expense on both sides. It has been previously hoped that a more collaborative effort could have been taken to explore more pathways to improved compliance within the cryptocurrency space.
The decision of the Full Court also underscores difficulties that participants within the industry are facing when it comes to rules for traditional finance and how they apply. Moreover, there are challenges for regulators when it comes to applying existing framework in the financial services industry to more decentralized products and services.
The Court’s decision further underscores a desperate need for further regulation, as well as a flexible approach regarding regulatory relief. Clear guidance on new services and products and how they comply with the law would be more than welcome.
