There is a lot of confusion and mystery surrounding cryptocurrency, not least amongst the general public but also potential investors. Add to this a lot of hype and excitement amongst IT professionals.
Certainly, cryptocurrency holds a lot of potential and an exciting promise of taking international monetary exchange out of the hands of traditional financial institutions.
The potential of innovation brought about by technology is certainly exciting, but society is often left in the lurch and many lawyers will be the first to agree that that the law is slowest to catch up.
With the advances in cryptocurrencies and the potential for capital raising, what does all this mean for new business in Australia?
Whatever changes might take place as the law catches up, as the law must catch up, businesses in Australia or looking to trade in Australia still have a set of rules to play by, and failing to know those rules will have serious consequences.
It is about knowing what the rules of the game are and making sure you play within them. That means stepping into the world of financial regulation.
There has been some debate whether virtual currency is a ‘currency’ or a commodity. The difference determines how cryptocurrencies are regulated.
“Money Market Corporation” or “Authorised Deposit-taking Institution”?
‘Money Market Corporations’ are typically financial brokers and provide financial services, whilst traditional banks are ‘Authorised Deposit-Taking Institutions’. The first are regulated by ASIC and the second by APRA.
ASIC – Businesses providing financial services require an AFSL (Australian Financial Services Licence) under the Corporations Act 2001 s911A. Licensees that hold ‘reportable client money’ are required to comply with record-keeping, reconciliation and reporting requirements set out under ASIC Client Money Reporting Rules 2017.
The role played by APRA is to supervise ADIs (Authorised Deposit-taking Institutions), which are authorised under the Banking Act 1959 (Cth) to accept currency deposits from the public. ADIs must comply with a range of requirements contained in Prudential Standards and provide comprehensive data to APRA under Reporting Standards. APRA has a range of powers it can exercise should an ADI not comply with any of the requirements imposed by APRA.
At present, legislation regulation treats virtual or cryptocurrency as a commodity, rather than a currency. As such the regulation of these bodies fall within the ambit of ASIC rather than APRA.
The legal status of ICOs
The legal status of an ICO is determined by how the ICO is structured and operated and the rights attached to the coin (or token) offered through the ICO.
There are a few possibilities to consider and more detailed information can be found on the ASIC website, however we’ve provided a brief summary below.
Trading of coins on a financial market
A ‘financial market’ is a facility through which offers to acquire or dispose of financial products are regularly made. An ICO coin will be a financial product where the rights attached to a coin matches a managed investment scheme, share, derivative or non-cash payment.
Managed investment scheme
The value of the coin arises out of an arrangement where people contribute assets to obtain an ‘interest’ in the scheme, the assets are pooled together but the contributors do not have day-to-day control over the operation of the scheme.
Offer of shares
Where an ICO is created in order to fund a company or undertaking of similar appearance, then the rights attached to the coins issued by the ICO may fall within the definition of a share. This will mean that the issuer will need to prepare a prospectus.
Offer of a derivative
In the broadest sense, a derivative is a product that derives its value from another ‘thing’. This could include a share, a share price index, a pair of currencies or a commodity such as a cryptocurrency.
Non-cash payment (NCP) facility
An NCP starts with a value that is not physical currency. This value is then used directly or converted to fiat currency to complete the transaction. Any platform that enables investors to buy, be issued, or sell these coins will involve the operation of a financial market and an AFS licence is required.
An ICO is Not Crowd-sourced funding (CSF)
The view adopted by ASIC is that ICOs are not CSF and as ASIC points out, care should be taken to ensure the public is not misled about the application of the CSF laws to an ICO.
What you need to know
On 28 September 2017 ASIC issued 17-325MR to provide guidance for initial coin offerings. ASIC states that an ICO ‘must be conducted in a manner that promotes investor trust and confidence, and complies with the relevant laws.
Care should be taken to ensure promotional communications about an ICO do not mislead or deceive potential investors, and do not contain false information.
Even if you are in the early stages of developing your cryptocurrency offering, getting advice at the ground roots is important. An initial coin offering and platform rollout is a major project that takes months and there are a lot of steps along the way, from raising capital to setting up your company.
If you need help preparing your offering and setting up the best framework for your business, call GLG Legal or email us at email@example.com.