The Australian Securities and Investments Commission (ASIC) has released its updated guidance with respect to the treatment of initial coin offerings (ICOs) and cryptocurrencies.
In its updated Information Sheet (INFO 225), the corporate regulator has clearly outlined its intent to crack down on any misleading or deceptive conduct by ICO issuers and cryptocurrency traders.
Misleading and deceptive conduct in trade or commerce is normally handled by the Australian Competition and Consumer Commission (ACCC), but when it comes to ICOs and cryptocurrencies, the ACCC has now hand-passed that responsibility to ASIC. Accordingly, ASIC Commissioner John Price has publicly made it very clear that:
“if you are acting with someone else’s money, or selling something to someone, you have obligations. Regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This is going to be a key focus for us as this sector develops.”
With respect to whether an ICO is considered as an offer of financial products, which attracts licensing and other obligations under Chapter 7 of the Corporations Act, the new INFO 225 by-and-large does not reflect any material change in ASIC’s position. Consistent with its previous guidance, ASIC requires an assessment of the underlying rights attached to digital ‘coins’ or ‘tokens’ issued at the ICO. If the rights attached to the coins or tokens make them look like or smell like securities, derivatives, interests in a managed investment scheme or a non-cash payment facility, they will be treated and regulated as such under the Corporations Act. Platforms that facilitate the trading of these coins and tokens that are financial products need to hold Australian market licence unless they have exemptions.
Further, ICO issuers should note that in ASIC’s opinion, “the mere fact that the token issued is described as a utility token does not mean that it is not a financial product. The mere existence of a statement that the ICO or the token is not a financial product does not mean that it is not a financial product.” It is therefore recommended that professional / legal advice is sought to ensure proper characterisation.
In any event, regardless of whether a digital coin or token is characterised as a financial product or not, ASIC will not be tolerating any behaviour that would mislead or deceive investors or consumers.
Some examples of conduct identified by ASIC that may mislead or deceive investors or consumers include:
- the use of social media to generate the appearance of a greater level of public interest in an ICO;
- undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for an ICO or a cryptocurrency;
- failing to disclose adequate information about the ICO; or
- suggesting that the ICO is a regulated product or the regulator has approved the ICO if that is not the case.
Therefore, care should be taken to ensure promotional communications about any ICO or cryptocurrency do not misrepresent the nature of the ICO or associated tokens. ICO issuers will need to ensure that the White Paper, Prospectus, Product Disclosure Statement or any other disclosure document (whichever the case may be) that they prepare for investors and consumers do not contain false information. Additionally, ASIC expects such disclosure information to be kept up-to-date where the nature of the ICO or cryptocurrency changes during the course of its development.
Finally, where the ICO is characterised as an offer of a financial product and issuers need to apply for an Australian financial services licence (or a licence variation), INFO 225 suggests that ASIC will:
- assess the application in accordance with applicable policy and based on its risk-targeted framework;
- consider that applications relating to cryptocurrencies are more likely to be novel applications and, if so, ASIC will take more time to assess the application; and
- work with businesses to identify the issues to be addressed in the application.
At the end of the day, ASIC appreciates that ICOs, cryptocurrencies and blockchain technology play an important role in capital raising and FinTech innovation.
However, ASIC emphasises that the issuing and trading of cryptocurrencies must be conducted in a manner that promotes consumer trust and confidence and complies with relevant laws – a theme that seems to be common across all Australian financial regulators in light of today’s regulatory climate.