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Michael Bacina, Steven Pettigrove, Tim Masters, Jake Huang,
Luke Higgins, Luke Misthos & Kelly Kim of the Piper Alderman
Blockchain Group bring you the latest legal, regulatory and project
updates in Blockchain and Digital Law.
ASIC appeals Finder decision
The Australian Securities and Investments Commission
(ASIC) has
announced that they will appeal the Federal Court’s
decision
dismissing ASIC’s allegations that Finder Wallet’s Earn
product was a debenture.
This crypto-asset Earn product allowed users to transfer cash,
purchase True AUD stablecoins and be paid a fixed return for giving
Finder the use of the stablecoins. Customers were paid in AUD on a
compounding return of either 4.01% or in some cases 6.01% with a
nifty little second by second counter showing the interest clocking
up.
ASIC had alleged that by providing the Earn product, Finder
Wallet provided unlicensed financial services, breached product
disclosure requirements and failed to comply with design and
distribution obligations.
ASIC’s allegation centred around the Earn product being a
debenture under Section 9 of the Corporations Act
2001 (Cth) (the Corporations Act)
– with which the Federal Court disagreed. A debenture is
defined as follows under the Corporations Act:
debenture of a body means a chose in action that includes an
undertaking by the body to repay as a debt money deposited with or
lent to the body. The chose in action may (but need not) include a
security interest over property of the body to secure repayment of
the money.
The Federal Court dismissed ASIC’s claims on 14 March 2024
and ordered ASIC to pay costs.
Now ASIC has appealed this decision. It said it is doing so
because
it is concerned that the Finder Earn product was offered without
the appropriate licence or authorisation and therefore without the
benefit of important consumer protections.
ASIC has pursued its case on the basis that the Finder Earn
product on the narrow basis that the product was a form of
debenture. In a
similar recent case involving Block Earner, ASIC alleged that two
yield bearing products also involving cryptocurrency related
offerings were in the form of a managed investment scheme,
financial investment or derivative. The primary judge in this case
was not required to address these matters based on ASIC’s
pleaded case.
It appears from ASIC’s
Notice of Appeal that it is basically re-running the same
arguments, claiming that the primary judge “erred in” in
applying the law, and his categorization of the Earn product
terms.
ASIC’s appeal is not a huge surprise, as the decision and
adverse costs order was a significant set back for ASIC, which has
recently
indicated its intention to test its regulatory
perimeter in relation to cryptocurrency related offerings.
It also follows a partial win in the Block Earner case, in
which
ASIC failed to establish that Block Earner’s access product was
a financial product.
The appeal will be heard by the Full Federal Court on a date to
be determined. It has been
reported that Finder is “disappointed” with
ASIC’s decision not to accept the Federal Court ruling, but is
prepared to diligently defend its product in the Full Federal
Court.
Australia scores early success in the war on
scams
The recent quarterly update from the National Anti-Scam Centre
published 12 March 2024, revealed an optimistic decline of 43%
in the overall scam losses in the year 2023 December quarter. In
particular, losses by cryptocurrency saw the sharpest decline by
74%. This is likely to be further reduced in the coming years, with
the report detailing plans for
cryptocurrency scam data to be collected commencing in early
2024, to begin the necessary work to begin making scam data
available to the Digital Currency Exchange sector.
In the report, Catriona Lowe, the Deputy Chair of the Australian
Competition and Consumer Commission (ACCC)
reflected the National Anti-Scam Centre’s commitment to:
Advocating for mandatory and enforceable industry codes for
banks, telecommunications providers, digital platforms, and
cryptocurrency exchanges.
The Australian Banking Association (
) welcomed the new report, with the CEO Anna
Bligh stating:
It is encouraging that efforts to protect people are making a
difference
However, Bligh warned that the fight against scams requires
collective effort:
we must all continue to remain vigilant…banks, government,
telcos, social media platforms as well as consumers continue to
work together to stay one step ahead of scammers.
In particular, she noted:
Scammers often use crypto exchanges as the getaway vehicle of
choice to siphon funds. Banks are now regularly blocking or
limiting suspect transfers to high-risk crypto exchanges.
The new
Scam-Safe Accord imposes a high standard of consumer
protection on banks and will see a $100M investment in a new payee
system. This is designed to reduce scams by allowing consumers to
verify the payee prior to transferring money. Other initiatives
under this Accord include:
introducing more warnings and payment delays for consumer
protection;
adopting technology and controls to prevent identity fraud, such
as the use of at least one biometric check for new customers;
Expanding intelligence sharing across the banking sector;
and
Requiring all banks to implement an anti-scams strategy to
enhance oversight of the bank’s scams detection and response
mechanisms
While the battle against scams continues, the early signs of
success in the latest report highlight that Australia’s
anti-scam strategies are headed in the right direction. With
combined efforts from institutions, regulators and consumers, it is
optimistic that more Australians will be safeguarded from scams. As
Lowe commented:
There is much more to be done, however we are making a
difference.
D’Oh Kwon: Terraform Labs and Founder lose SEC
battle
Following a nine day trial in the Manhattan federal court, a
verdict has been handed down by the jury,
finding Terraform Labs and its co-founder, Do Kwon, liable for
security fraud by misleading investors. The director of the
SEC’s enforcement division, Gurbir S. Grewal, had the following
to say:
Terraform Labs and [Do Kwon] deceived investors about the
stability of the crypto asset security and so-called algorithmic
stablecoin TerraUSD, and they further misled investors about
whether a popular payment application used Terraform’s
blockchain to process and settle payments
The SEC’s position is consistent with their rhetoric when it
comes to cryptocurrency and blockchain, signalling that there is
likely to be no change in course from the SEC’s
“regulation by enforcement” approach, alleging that
crypto projects should register with the SEC and comply with
existing laws, while ignoring the many lawyers, and Commissioner
Hester Peirce, who have pointed out there is no actual way for
crypto projects to register or comply:
For all of crypto’s promises, the lack of registration and
compliance have very real consequences for real people. As the hard
work of our team shows, we will continue to use the tools at our
disposal to protect the investing public, but it is high time for
the crypto markets to come into compliance
The jury deliberated for a mere two hours after the closing
arguments were heard from the lawyers for the SEC and defendants.
The SEC’s primary argument was that Kwon and Terraform Labs,
under his direction, had deceived investors and consumers about the
nature of the algorithm that pegged its stablecoin, TerraUSD
(TUSD), to the US dollar.
The SEC believes that Do Kwon implied to the public that the
algorithm underpinning the peg operated independently of human
interference. This was a topic hotly debated by crypto enthusiasts
and industry experts alike, with many believing the collapse of
Terra/Luna and TUSD was
attributable to a
“
complex phenomenon that happened across multiple chains and
assets“, rather than concentrated market
manipulation by a third party. As evidenced by the jury’s
decision, the claim that the algorithm was immune from market
manipulation (i.e. human interference) was accepted as fraudulent
behaviour by Do Kwon and Terraform Labs.
As
reported by CoinDesk, a representative for Terraform Labs
stated that they were continuing to consider their options (such as
an appeal) and otherwise remained steadfast that the SEC does not
have authority to bring the case against them.
Shrouded in controversy since Terra/Luna’s collapse in May
2022, debate still looms online amongst enthusiasts as to whether
the actions of Do Kwon were wrong, or whether these actions by the
US and South Korea are simply first hand examples of two
jurisdictions wanting to send a message.
Despite a verdict being reached in New York, the battle between
the US and South Korea for Do Kwon’s extradition remains, with
the
Montenegro Supreme Court assessing the conflicting
requests.
In the wake of the Manhattan federal court’s verdict, Do
Kwon and Terraform Labs face the consequences of deceiving
investors about TerraUSD’s stability. As sentencing looms, the
debate over jurisdiction and accountability continues, casting a
shadow over the future of cryptocurrency regulation.
ERC-3643: Compliance by design
The ERC-3643 is a token
standard for real-world asset tokenization, with an
‘open-source suite of smart contracts’ which facilitate the
‘issuance, management and transfer of permissioned tokens’.
The standard is an extension of the ERC-20 standard (a
well-established standard for fungible tokens), with a distinct
compliance layer through a conditional transfer function. This
ensures that token transfers are only executed after approval from
a validator which verifies compliance with pre-defined governance
criteria.
Screenshot from https://tokeny.com/erc3643/
Tokeny, a leading compliance infrastructure provider for asset
tokenisation, first developed the standard in 2018 under the name
T-REX (Token for Regulated Exchanges). Upon acceptance by the
Ethereum Community last December, the standard was given the
current label, ERC-3643. The standard is now backed the ERC3643 Association tasked
with driving its adoption through education and
coordinating key stakeholders. To date, the total value of assets
tokenized using the standard exceeds USD$28B.
Luc Falempin, the co-founder of Tokeny explained in a blog
post:
By creating ERC-3643 with the Ethereum technology stacks, we
ensure the interoperability…with other applications in the
ecosystem.
Tokeny has identified the
key benefits of the standard as:
- Encoded compliance (where rules are embedded within the token
at the smart contract level); - Issuers with greater control over securities;
- Reduced costs;
- Increased transferability and liquidity.
The official
whitepaper, dated May 2023, explains the standard was:
Designed to address this need to support compliant issuance and
management of permissioned tokens, that are suitable for tokenized
securities, either on a peer-to-peer basis or through regulated
trading platforms.
ERC-3643 tokens can readily tokenise traditional financial
assets today, as their permissioned qualities enable compliance
with existing AML and registry requirements. The tokens are also
compatible with most existing ERC-20 standard based platforms and
can be integrated with minor modifications. The ERC-3643 can be
adapted for real-world assets, securities, stablecoins, E-money and
loyalty programs, however, new applications continue to be
explored.
On 9 April 2024, Tokeny announced its partnership with the SILC
Group to pilot alternative assets through
tokenisation using the ERC-3643 standard. The pilot
project will assess the potential of blockchain to ultimately
replace the various legacy centralized systems that are used to
administer funds used by SILC.
Efforts to drive adoption of ERC-3643 are ongoing, with
DevPro and Tokeny jointly releasing an open-source UI component for
the standard in January 2024. This plug-in bridges ERC-20
compatible DeFi applications with permissioned tokens issued under
the ERC-3643 standard, ensuring interoperability.
With the ERC-3643 bringing ‘compliance into the realm of
permissionless DeFi’, the standard offers a pathway for
traditional financial assets to trade on public blockchains. This
is likely to foster
increasing institutional interest in adopting blockchain
technology to unlock the efficiencies of smart contracts in trading
and asset administration, and with a view to increasing
tokenisation of financial markets.
Wall St titans back ETFs, as Bitcoin goes
mainstream
BlackRock’s iShares Bitcoin Trust (IBIT) has seen a surge in
interest from major US banks, marking a significant shift in Wall
Street’s historically sceptical stance on cryptocurrency. In
a
recent SEC filing, BlackRock disclosed that Citadel, Goldman
Sachs, UBS, and Citigroup have been named as “authorized
participants” for IBIT. Authorised participants play a crucial
role in maintaining the correlation between IBIT’s price and
that of bitcoin by creating and redeeming shares in the ETF as
necessary.
While the addition of these traditional finance or
“tradfi” titans underscores the growing institutional
acceptance of cryptocurrency, it also raises eyebrows given their
historical reservations. Goldman Sachs, for instance, has long been
critical of crypto, with its executives dismissing it as an
investment asset class. Sharmin Mossavar-Rahmani, CIO of the
bank’s wealth management unit,
recently reiterated this sentiment, stating that neither she
nor the bank’s clients are believers in crypto.
However, despite such reservations, Goldman Sachs has
established
a dedicated digital assets unit, signalling a pragmatic
approach to the evolving market dynamics. The bank’s move to
support BlackRock’s bitcoin ETF comes
amidst a broader trend of institutional engagement with digital
assets (see recent efforts from
MasterCard and
Citi).
The allure of bitcoin ETFs has proven irresistible to investors,
with reportedly
over USD $12 billion in net inflows recorded since their launch in
January. BlackRock’s ETF alone boasts assets exceeding USD
$16 billion, underscoring the continuing mainstream appeal of
cryptocurrencies.
The inclusion of major US banks as partners in BlackRock’s
bitcoin ETF signifies an important moment in the mainstreaming of
cryptocurrency and bitcoin’s growing legitimacy as an asset
class. The newly announced Authorized Participants join a number of
leading US money managers who have launched their owned Bitcoin
ETFs. As the blockchain ecosystem matures, traditional financial
institutions are recalibrating their strategies to embrace the
emerging digital frontier.
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