An Australian federal court has determined that fintech company Block Earner engaged in unlicensed financial services conduct by offering its crypto-backed Earner product.
The Federal Court finds fintech company Block Earner engaged in unlicensed financial services conduct when offering its crypto-backed Earner product https://t.co/TS7Xf8emuf pic.twitter.com/XOrxvZsEft
— ASIC Media (@asicmedia) February 9, 2024
The court has drawn a nuanced line regarding crypto-yield products, indicating that while those promising managed yields necessitate a financial services license, decentralized-finance (DeFi) “pass-through” products may not.
Australian Federal Court Imposes Penalties on ‘Earner’ Offering
The ruling, issued on Feb. 9 by federal court judge Ian Jackson, addressed Block Earner’s offerings, imposing penalties over its “Earner” product while refraining from applying the same to its DeFi “Access” product.
Block Earner, facing penalties for its “Earner” product’s offering in 2022, which entailed yield for loans, Bitcoin (BTC), Ether, and PAX Gold (PAXG), was deemed to require an Australian Financial Services License (AFSL), according to Jackson’s order. This ruling marks one of the first decisions on the application of financial services law to crypto-backed products.
The Court found that Block Earner’s Earner product constituted an unregistered managed investment scheme and facility for making a financial investment under the law, thus requiring licensing. However, the court differentiated Block Earner’s DeFi “Access” product, stating that it did not operate under a managed investment scheme and was hence exempt from AFSL requirements.
From March 2022 to November 2022, Block Earner provided consumers with the Earner product, enabling them to earn fixed-yield returns from various crypto-assets. Block Earner remarked on the nuanced implications of the court’s decision for both the company and the broader crypto industry in Australia, emphasizing its significance in providing guidance on the applicability of Australian financial services laws to crypto-related products and services.
Australian Court Rules on ASIC’s Case Against Block Earner’s Crypto Products
The case, initiated by the Australian Securities and Investment Commission (ASIC), alleged violations of corporation laws by both Block Earner’s Access and Earner products. Michael Bacina, a digital asset lawyer at Piper Alderman, clarified that Access functioned as a pass-through to DeFi, contrasting it with Earner, which involved representations of users’ crypto yielding returns.
Crucially, Bacina emphasized the importance of aligning marketing with product features for Australian crypto businesses, underscoring the need for clear representations to avoid regulatory pitfalls. While the Earner product operated from March 17, 2022, to Nov. 16 of the same year, the company confirmed its termination before proceedings commenced and assured that the findings wouldn’t impact its current products.
While ASIC’s allegation regarding Block Earner’s variable-yield crypto-asset-based offering, referred to as the Access Product, was unsuccessful, the Court did not categorize it as a financial product. Block Earner markets the Access Product as providing access to decentralized finance (DeFi) lending protocols, a characterization the Court accepted.
However, Aaron Lane from the Royal Melbourne Institute of Technology’s Blockchain Innovation Hub anticipated potential licensing conditions for Block Earner under the Australian Treasury’s proposed legislation for the crypto sector, pending its passage.
ASIC will now pursue orders from the court for pecuniary penalties against Block Earner. The proceedings are scheduled for a case management hearing on March 1, 2024. This decision underscores the importance for firms offering products with crypto-assets to carefully assess their regulatory obligations and ensure compliance with existing regimes.
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