Misleading & deceptive conduct and cryptocurrencies – ASIC turns up the heat in uncertain territory

Introduction

ASIC has commenced civil penalty proceedings in the Federal Court against BPS Financial Pty Ltd (BPS) for allegedly making false, misleading or deceptive representations and engaging in unlicensed conduct in relation to a non-cash payment facility involving a crypto-asset token called Qoin (Qoin). ASIC is seeking declarations, pecuniary penalties, injunctions and adverse publicity orders from the Court.

It is tricky territory, given crypto assets themselves are vastly different and behave differently as we outlined in our article here. For cryptocurrencies, many view them as quasi-financial products in and of themselves. Senator Bragg’s The Digital Assets (Market Regulation) Bill 2022 would have them classified as such, along with non-fungible tokens and other crypto products unrelated to financial services. But that legislation is not yet law, and only crypto derivatives, non-cash payment facilities (NCP) and funds-related products are currently classed as financial products.

Complicating the matter is that there are no ‘issuers’ for crypto per se in a traditional financial services context, save for developers (who are rarely concerned with legal disclosure documents). Unlike derivatives, equities, bonds and other financial products, there is not the same level of information to test for crypto market participants. All of which makes ASIC’s action an interesting – and unsettling – case study for the industry. It does offer some practical guidance on the way forward though.

Facts

BPS allegedly made false, misleading or deceptive representations in marketing the Qoin token, including through the following statements:

• consumers who purchased Qoin tokens could be confident that they will be able to exchange them for other crypto-assets or fiat currency;
• Qoin tokens can be used to purchase goods and services from an increasing number of merchants;
• the Qoin Facility and/or the Qoin wallet application used to transact Qoin tokens are regulated, registered and/or approved in Australia, and
• the Qoin Facility and/or BPS are compliant with financial services laws.

ASIC alleges that Qoin merchant numbers were declining, however, more importantly in the words of ASIC Deputy Chair Sarah Court “…ASIC is particularly concerned about the alleged misrepresentation that the Qoin Facility is regulated in Australia, as we believe the more than 79,000 individuals and entities who have been issued with the Qoin Facility may have believed that it was compliant with financial services laws, when ASIC considers it was not”. Of course, whether or not that is the case depends on whether the Qoin token was an NCP (covered below).

Misleading & deceptive conduct

In Australian Competition and Consumer Commission v TPG Internet Pty Ltd[1], the Court clarified that the central question is whether the impugned conduct, viewed as a whole, has a sufficient tendency to lead a person exposed to the conduct into error (that is, will they form an erroneous assumption or conclusion about the matter). As additional guidance, the Courts have also indicated that:

• conduct is likely to mislead or deceive if there is a real/not remote chance or possibility of it doing so[2];
• it is not necessary to prove an intention to mislead or deceive[3];
• it is unnecessary to prove that the conduct in question actually deceived or mislead anyone[4];
• it is not sufficient if the conduct merely caused confusion[5]; and
• if the conduct in question is directed to the public (or a section of the public), the Court will consider the likely effect on an ordinary and reasonable person in the relevant class to whom the conduct is directed[6].

In assessing these scenarios, the relevant legislation for financial services providers is s 12DA and DB of the ASIC Act (which ASIC has relied on in its action). As indicated from the case-law above, this is a strict liability offence. Therefore, if the activity has the potential to mislead or deceive, no evidence of an innocent state of mind will be able to serve as protection. The above standard is more stringent than the requirement under s 1041H of the Corporations Act 2001 (Cth) regarding misleading and deceptive conduct in relation to the provision of a financial product or financial service, as the latter is not a strict liability offence.

Financial product?

There is a very low bar for misleading and deceptive conduct for financial products and services. But is Qoin a ‘financial product’, bringing it within the scope of the legislation and ASIC’s licensing powers?

An NCP is a payment not made through the physical delivery of Australian or foreign currency. Examples of NCP facilities include stored value cards, electronic cash and direct debit services. As ASIC itself notes, just because a crypto-asset is the form of value that is used to complete a transaction does not necessarily mean that the crypto-asset is an NCP facility. Whether or not a crypto-asset is, or involves, an NCP facility will depend on the rights and obligations associated with the asset. If the asset provides the holder with a right to use the asset to make a payment, it is likely to be an NCP facility.

ASIC has only released its Originating Process, which does not give an indication of the facts it will rely on to state that Qoin is a NCP (we will have to wait for the affidavit material for that!). The industry will need to wait to see ASIC’s analysis, though presumably it rests on the fact that the design of the Qoin token provides rights to use the asset to make payments at merchants and/exchange for fiat currency.

Takeaways

As we set out in our latest financial services regulatory blog, the crypto currency industry is in a difficult position until further clarity on the regulatory framework is put forward.

Until such time as clarity is forthcoming, it is paramount that exchanges, funds, issuers and other businesses marketing crypto currencies be certain of the rights attached to crypto-assets, as they are a key consideration in assessing their legal status as a financial product.

It is a difficult task. Rights may be described in the crypto-asset’s ‘white paper’, underlying contracts governing the token or from other circumstances (e.g. how the crypto-asset is marketed). ASIC has been very clear in INFO 225 that “What is a ‘right’ should be interpreted broadly. Rights that may arise in the future or on a contingency, and rights that are not legally enforceable, are included.”

There is uncertainty in the legal framework around crypto currencies, complexity in the products themselves, a low struct liability bar for getting it wrong and a hawkish regulator in ASIC. Time spent double checking the crypto assets is time well spent.

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Authored by:

Matthew Bode, Partner
Taylor Green, Associate
Munkh-Erdene Saruul, Paralegal

[1] (2020) 278 FCR 450.

[2] Global Sportsman Pty Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82.

[3] Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216.

[4] Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177.

[5] Google Inc v ACCC (2013) 249 CLR 435.

[6] Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45.