Tracking ASIC's 2023 enforcement priorities one year on: part two

The judgement of Markovic J in Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder) is a significant decision because it deals with the question of whether a stable coin product provided by Finder Wallet Pty Ltd (Finder) was a debenture for the purpose of regulatory provisions in the Corporations Act 2001 (Cth), and represents ASIC’s ongoing commitment to testing the limits of regulatory reach in this space.

The decision in ASIC v Finder follows the decision of Jackman J of the Federal Court last month in Australian Securities Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 (ASIC v Web3) – which we published an article on. Whereas in ASIC v Web3, the regulator was successful, in ASIC v Finder it was unable to persuade the Court that the cryptocurrency product in question was subject to corporate regulation.

In summary, the Court held that a fixed-interest product offered by Finder Wallet was not a debenture because the “loan” was not a loan of money, but rather a loan of a stablecoin. Finder Wallet was not in fact required to repay money as a debt (being the hallmark attribute of a debenture product).

The Finder Earn Business

The product offered by Finder operated as follows:

1. The product, known as Finder Earn, was marketed as making use of a cryptocurrency called TrueAUD (or TAUD), described as a stable coin pegged against the currency or asset which it aims to reflect digitised in the blockchain ecosystem. The relevant currency was Australian dollars.
2. A consumer would acquire, invest in, or use the Finder and product by:
2.1 opening an account with Finder Wallet;
2.2 depositing Australian dollars into the wallet;
2.3 transferring the currency in the wallet to TAUD;
2.4 allocating the TAUD to the “Cryptocurrency Earn” option within the app to earn an annual return of 4%.

Importantly, there was no mechanism for the consumer to convert AUD to TAUD then withdraw or retain that TAUD. The conversion from AUD to TAUD, and allocation of the TAUD to Finder Wallet occurred simultaneously when the customer selected transfer and convert.

ASIC’s case against Finder

ASIC alleged that, in these circumstances, the true nature of the transaction between a consumer and Finder was that of the granting of a debenture within the meaning of section 9 of the Corporations Act 2001 (Cth). This allegation was underlined by a characterisation of the facts which sought to portray the acquisition of an interest in TAUD by a consumer as being the creation of a debt which Finder was liable to repay.

In defence of ASIC’s allegations, Finder argued that the true legal effect was that the customer purchased or transferred an amount of TAUD to Finder Wallet and title to the cryptocurrency that was transferred then passed from the customer to Finder Wallet. It submitted that the allocation did not create a debt owed by Finder Wallet to repay AUD to the consumer. Rather, Finder submitted that the consumer had a contractual right to receive at the end of the term an amount of TAUD equivalent to the allocation and an additional amount of TAUD for the use of the allocation during the term – being the 4% p.a. interest.

The Federal Court’s decision

The term “debenture” is defined in section 9 of the Corporations Act to mean:

“Debenture of a body means a chose in action that includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may (but need not) include a security interest over property of the body to secure repayment of the money.”

Similarly, at common law a debenture has two characteristics: it is issued by a company; and it acknowledges or creates a debt. The debt may be secured on assets of the company, but security is not an essential characteristic of a debenture.

Finder successfully submitted that it was “artificial and inconsistent with the well settled principles underpinning the concept of a debenture” to conflate money transferred into a Finder Wallet account with the deposit of that money into a separate financial product. The Court found that, if it were otherwise, the corollary would be that any transfer of money into an account comprises a debenture.

In short, Finder submitted (and the Court accepted) that the Court must distinguish between the Finder Earn product on the one hand, and the transfer of AUD into the Finder Wallet account on the other. The effect of this distinguishment is that the customer engages in two transactions; first the purchase of an interest in TAUD; and secondly an investment involving the allocation and outright disposal of that interest in TAUD to Finder Wallet in exchange for the contractual right to the return.

Markovic J emphasised in her judgement that, when identifying the relevant contractual terms, the correct approach was to only include the express terms available to the customer at the time of acquiring an interest in TAUD and the Cryptocurrency Earn product. Her Honour was not persuaded that the marketing or explanatory material located on the Finder app or website comprised contractual terms between Finder and its customers. This reasoning may be contrasted against the judgement of Jackman J in ASIC v Web3 where His Honour was persuaded that content on the respondent’s website comprised contractual terms.

A further important factor in the judgement was that the TAUD acquired by consumers was a species of property. It was not a deposit with or loan of monies to Finder, but rather an asset the legal title to which was transferred by consumers to Finder for the duration of the term.

Our insights

This decision will be of little impact to Finder given it has stated it will not reintroduce it's Finder Earn product because higher interest rates have made yield earning products of around 4% uncompetitive.

However, this decision will affect any business operating a cryptocurrency product involving the transfer of cryptocurrency assets by customers, or the purchase by customers of cryptocurrency assets such as stablecoins. This is potentially a large number of businesses in the crypto space.

On the reverse side, the decision also potentially clears the way for businesses to offer debenture-like products without being subject to debenture regulation by interposing a cryptocurrency product and transfer process as Finder Wallet did.

Further, this decision reiterates ASIC’s commitment to enforcing compliance with Australia’s corporate and financial services regulations on cryptocurrency businesses. Directors should continue to closely consider their corporate regulatory obligations at every step of developing, running and exiting crypto businesses.

Our Australian team has experts who can advise at all stages of corporate regulatory compliance. Please reach out anytime to discuss these important issues.

Addendum

On 10 April 2024, ASIC announced that it filed an appeal against the decision of the Federal Court in the proceedings.
ASIC’s appeal is brought on the following two grounds:

1. The Court should have found that the Finder Earn product was a debenture because:
(a) on the proper construction of the terms of agreement there was a loan or deposit; and
(b) the parties should reasonably be assumed to have regarded the acquisition of TAUD and the transfer of it to Finder as one transaction.

2. The Court should have found that there was an undertaking to repay money as a debt.

The appeal will be heard by the Full Court of the Federal Court on a date to be fixed. We will provide further updates as this important case continues through the appeal process.