Cryptocurrency exchange developer Byte Power Group has suspended an offer of tokens after the Australian Securities and Investments Commission raised concerns that it may be selling financial products without the appropriate licence.
ASX-listed Byte Power, which has a cryptocurrency exchange under development, announced the launch of BPX Tokens in July, offering utility tokens relating to a loyalty program which provides a discount on commissions for users of the Byte Power Cryptocurrency Exchange.
In September, Byte Power issued a statement saying the tokens were not financial products, after receiving a query from ASIC. But last week it suspended the offer after learning that ASIC had concerns that the BPX Tokens may constitute interests in a managed investment scheme. If that were the case Byte Power would need an Australian Financial Services licence.
Byte Power has issued 15.6 million BPX Tokens to investors in Australia and Singapore, since July. The company says it will continue to work with ASIC and is seeking legal advice.
The suspension of Byte Power’s token issue illustrates the widespread uncertainty about the regulatory position of token issuers.
ASIC shed some light on the issue last week, when commissioner John Price spoke at a Monash Centre for Commercial Law and Regulatory Studies symposium. Price says the corporate watchdog’s dealings with companies making initial coin offerings and other token generation events over the past year has been a “mixed experience”.
Price says the regulator has had to warn some issuers that it will not tolerate misleading and deceptive conduct. “There is one law that will always apply – you can’t make misleading or deceptive statements about the product. This is a key focus for us and Australian law prohibiting misleading or deceptive conduct will apply in this space, regardless of whether there is a financial product involved,” he says.
ASIC has developed an information sheet for those entering the ICO market. The information sheet explains that where a token offered through an ICO is a financial product, additional laws may apply above and beyond the prohibition on misleading conduct.
Price says the legal status of an ICO is dependent on the circumstances of the offering, such as how it is structured and operated, as well as the rights attached to the token. “This is a complex regulatory topic,” he says.
Charmian Holmes, a lawyer at The Fold Legal, says there is no black and white rule to determine whether a crypto asset is a financial product. However, her analysis of different assets suggests the following:
- If the value of the token is tied to the price of gold or an interest rate, it is likely to be a derivative;
- If the token is attached to a loan, it is likely to be a debenture;
- If the token is backed by an asset like gold, it is likely to be a debenture;
- A token issued as a reward for repaying a loan or making a loan to someone else is likely to be a debenture;
However, if it is a crypto purchasing service, no financial service is provided.
Holmes says that if any of the following features are present, the token is likely to be a financial product:
- Token issuers can buy back the coin;
- Token holders have rights to profits of the enterprise;
- Tokens are backed by an asset or commodity;
- Tokens can be converted into another asset;
- Investors have a right to receive profit now or at a later date;
- Tokens can be converted into shares or equity;
- Token holders are lending money and can expect a repayment of the money; and
- Investors are pooling resources to invest in the token.
Price says Australian corporate and consumer law might apply even if an ICO is created and offered from overseas. “This is an important point, given the international nature of the sector,” he says.
ASIC engages with fintech and regtech start-ups through its Innovation Hub, which has been designed to help businesses understand its regulatory approach.
“While it is very important that we do not stand in the way of change, we also need to continue to target our strategic objectives to ensure good governance in the financial sector,” Price says.