Is Bitcoin a “financial product” according to the Australian Securities and Investments Commission (ASIC)? In terms of the actual currency itself? The short answer is ‘no’.
ASIC’s original submission to the Senate inquiry into digital currency in December 2014 suggested that digital currencies themselves do not fit within the current legal definitions of a ‘financial product’ under the Corporations Act 2001 (Corporations Act) or the Australian Securities and Investments Commission Act 2001 (ASIC Act).
However, due to the increase in initial coin offerings (ICOs) and the wide variety of purposes for which coins (or tokens) are used, ASIC has since updated its information fact sheet INFO 225[1] and while particular pure digital currencies such as Bitcoin still do not fit within the current legal definition of a financial product, crypto-assets and ICOs can be classified as financial products based on their inherent characteristics or structure.
If a crypto-asset falls within the regulatory provisions dealing with financial products and financial services, then the person(s) dealing in that financial product will be required to hold an appropriate Australian Financial Services Licence (AFSL) or be an Authorised Representative of an AFSL. Further, disclosure requirements (such as a product disclosure statement) may also be required.
ASIC encourages entities seeking to undertake an ICO or the issue of a “crypto-asset” to carefully consider the nature of the ICO or crypto-asset, and the information provided to consumers.
ASIC advises of three key factors to consider when determining whether a crypto-asset is a financial product:
1. Legal rights attached to the crypto-asset – Does the recipient receive any ownership rights such as voting or distributions;
2. Function or purpose of the crypto-asset – Is its value linked to an off-platform asset, commodity or index;
3. How was the crypto-asset funded – Are investor funds pooled for a common financial benefit?
A consideration of the above factors may assist to determine whether the crypto-asset itself could be classified under a financial product or service.
It may be that the cypto-asset falls within the definition of other traditional forms of financial products and services such as:
- Managed Investment Schemes
- Shares
- Derivatives
- Non-cash payment facilities
When crypto-assets are not financial products – specific examples
ASIC has been clearer when it comes to specific activities. For instance, a person does not need:
- an Australian market licence to operate a digital currency trading platform; or
- an Australian financial services (AFS) licence in order to:
- trade in digital currency; or
- hold a digital currency on behalf of another person; or
- provide advice in relation to digital currency; or to
- arrange for others to buy and sell digital currency.
Specific facilities such as:
- Bitcoin ATMs
- Cryptocurrency wallets,
are also considered not to be financial products. This is in large part because ASIC considers arrangments which facilitate the instantaneous, transfer, purchase and/or sale of cryptocurrencies to be a factor in determining that a facility is not a financial product:
…contracts for the sale or purchase of digital currencies that are settled immediately are not financial products and are not regulated by ASIC.
When crypto-assets are financial products – specific examples
ASIC as mentioned some specific facilities which are considered financial products. These include:
- contracts for difference over bitcoins
- intermediaries who receive bitcoin as part of a merchant facility and who transfer the Bitcoin into fiat currency. For instance, PayPal was used as an example where the purchaser pays in bitcoin but the merchant receives fiat currency in payment for goods or services
- bitcoin to EFTPOS facilities such as Coinjar Swipe
- bitcoin-based bill payment facilities, such as the Living Room of Satoshi
- escrow facilities.
ICOs and crypto-assets that are not financial products are subject to the general law and Australian consumer laws, which include prohibitions against misleading or deceptive conduct. Australian law and regulations may apply even if the ICO or crypto-asset is issued or sold by a foreign entity.