Amid the rise of crypto-assets and new market entrants, ASIC has released guidance on regulatory implications for industry participants. What do you need to know about fact sheet 225?

ASIC recently released fact sheet 225 Crypto-assets (INFO 225) to provide guidance on the regulatory implications for the various stakeholders involved in transactions in crypto assets.

In addition to this advice, ASIC has also recently published Best Practice Guidelines for Authorized Australian Stock Exchanges which admit exchange-traded funds and other structured products: Fact Sheet 230 Exchange Traded Products: Admission Requirements (INFO 230). INFO 230 includes ASIC’s view on the principles that authorized Australian exchanges should take into account in determining whether certain crypto assets may be permitted underlying assets for exchange traded products (AND P) which have been admitted to listing on their market.

Given the growing prevalence of cryptoassets in financial services, ASIC’s advice is timely. This article is about INFO 225.

Who is affected by the guidelines of INFO 225?

The guidance contained in INFO 225 will be relevant to a wide range of direct and indirect participants in the cryptoasset industry. This includes the initial coin offering (ICO) issuers, payment system intermediaries, cryptocurrency miners and transaction processors, exchange and trading platforms, payment service providers and merchants, and portfolio and custody service providers.

What types of assets do the INFO 225 guidelines apply to?

ASIC considers that crypto-assets are not part of a homogeneous asset class. ASIC’s reference to “crypto-assets” is intended to include cryptocurrency (such as bitcoin), tokens (usually issued during ICOs), and stablecoins (whose value is usually tied to another crypto). currency, fiat currency or other structured products).

ASIC defines a “crypto-asset” as:

“A digital representation of the value or rights (including property rights), the ownership of which is evidenced cryptographically and which is held and transferred electronically by:

• a type of distributed ledger technology; Where
• another cryptographically verifiable distributed data structure. ‘

This definition is useful and ASIC intends to use it to administer the specific new class of ‘crypto-asset’ financial products when granting authorizations to registered managed investment funds holding crypto-assets. active. However, ASIC clarifies that this definition should not be used for other purposes.

What should industry participants do?

• Evaluate their current crypto asset arrangements against what ASIC described as their crypto asset expectations in INFO 225 and INFO 230.
• Map and document the characteristics of each of the products they issue or distribute that fall within the scope of the obligations.
• Determine if changes need to be made to the characteristics of the affected products (or their operation) to continue to meet applicable obligations.

When is a crypto-asset a “financial product”?

A key regulatory consideration for crypto-asset stakeholders is whether the relevant crypto-assets are, or involve, a financial product within the meaning of Chapter 7 of the Companies Act 2001 (Cth) (Corporations Act). If the asset is a financial product, the activities related to that asset are carried on as a business and an exemption does not apply, then the entity carrying out those activities must obtain an Australian Financial Services License. (AFSL) and comply with a series of obligations such as information obligations if retail clients are involved.

INFO 225 provides a non-exhaustive checklist suitable for crypto-assets to determine whether a crypto-asset could constitute a financial product or if an ICO involves a financial product:

• All rights and features are relevant: In determining whether a crypto-asset or ICO is or involves a financial product, ASIC indicates that entities should take into account all the rights and characteristics of the proposed crypto-asset or ICO and how it will be offered. . ASIC indicates that the concept of “right” should be interpreted broadly.
• The conclusions must be motivated: Entities are expected to clearly justify their conclusions when not viewing a crypto asset as a financial product.
• Interests in a managed investment system: Issuers are likely to offer interests in a managed investment system (being a financial product) if the rights and value of the crypto-asset are tied to an agreement that includes the three key elements of a system. managed investment. These characteristics are as follows: 1) people contribute money or assets (such as cryptocurrencies or other crypto assets) to acquire interest in the program; 2) the contributions are pooled or used in a joint venture to produce benefits (e.g. using funds to develop a platform) for purposes that include producing a financial benefit for the contributors (e.g. example, from an increase in the value of their tokens); and 3) contributors do not have day-to-day control over the operation of the scheme.
• Security: ASIC indicates that crypto-assets issued through an ICO will likely constitute “securities” for the purposes of the Companies Act when the rights attached to the crypto-assets are similar to those generally attached to a stock – for example when there appears to be a property, a right to vote or a certain right to participate in the profits of the body. Cryptoassets that offer the right to buy shares of a company at a later date, for example when it is listed on the ASX, can also provide security in the form of an option to call. ‘actions.
• Derivative: A cryptoasset or ICO can involve a derivative if its price is based on the value or amount of something else such as the price of another financial product, an underlying market index, or a movement in the price of ‘active. ASIC gives an example of a crypto-asset that is a derivative because it contains a self-executing contract involving payment terms that are triggered by changes in the relevant price of the product, index or asset under -jacent.
• Non-cash payment facility (PCN): ASIC says that a cryptoasset is not necessarily an NCP installation just because it is a form of value used to complete a transaction. Whether or not a crypto asset constitutes an NCP facility will depend on the individual rights and obligations associated with the asset. If the holder has the right to use the asset to make a payment, it will likely be an NCP facility. ASIC expects crypto-assets such as tokens offered through an ICO to be unlikely to be NCP installations. However, an ICO may involve an NCP installation if the arrangement under it allows:
  • payments to be made in this form of value to a number of beneficiaries; Where
  • payments must be started in this form and converted to fiat currency to allow payment to be completed.

Tips for providing retail investors with exposure to crypto-assets through regulated investment vehicles

This section of the guide covers ETPs, listed investment companies, listed investment trusts and unlisted investment funds that are provided to retail investors. Specific guidance for ETP issuers regarding the admission of crypto-assets as underlying assets is provided in INFO 230.

INFO 225 sets out various matters for which it expects the responsible entities (D) for registered managed investment funds. A brief summary of these guidelines is presented below.

Deceptive and deceptive conduct

ASIC notes in INFO 225 that prohibitions under Australian Consumer Law from engaging in deceptive or deceptive behavior will apply to crypto assets or ICOs that are not, or do not involve, commodities. financial. For crypto assets or ICOs that are or involve financial products, the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth) each impose a ban on engaging in deceptive and deceptive behavior.

ASIC provides the following examples of the types of conduct that can be deceptive or deceptive:

• assert or give the impression that the crypto-assets (such as coins or tokens) or ICOs offered are not a financial product if they are not;
• assert or give the impression that a crypto asset trading platform does not quote or trade financial products if it does not;
• use social media to generate the appearance of greater public interest in a cryptoasset or ICO;
• undertake or cause a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for an ICO or crypto asset;
• fail to disclose adequate information about the ICO or the crypto asset; and
• suggesting that the ICO or crypto-asset is a regulated commodity or that the regulator has approved the ICO or crypto-asset if not.

Categorizations of cryptoassets by foreign regulators in the Australian context

The ASIC makes it clear that Australian laws, including those that prohibit deceptive and deceptive behavior, may continue to apply even when offshore or decentralized structures are used to issue, trade or sell crypto assets in Australia.

It is also recognized that the definition of financial product is often broader in Australia than in other jurisdictions. For this reason, the particular rights and characteristics of individual crypto-assets and individual ICOs must be considered independently of the Australian context.