ASIC presses for penalties and crypto regulatory clarity with Block Earner appeal

The decision by the Australian Securities and Investments Commission (ASIC) to appeal the latest Block Earner decision should give crypto asset providers some cause for concern. The regulator has signalled that, despite some recent court losses, it is prepared to continue its focus on the emerging industry in its pursuit of regulatory clarity.

In February of this year, the Federal Court of Australia (FCA) found that the Defendant (Block Earner) had contravened the Corporations Act 2001 (Cth) (Act) by carrying on a financial services business without holding an Australian financial services licence (AFSL) and operating an unregistered managed investment scheme with respect to its ‘Earner’ crypto-asset product.[1]

Despite the FCA finding that Block Earner had contravened the Act, it decided not to impose any penalties for the contraventions. Justice Jackman was satisfied that Block Earner had made out the grounds of its defence under the Act and found that Block Earner had acted honestly and ought fairly to be excused from the contravention.

The decision may have been taken by some in the industry as a welcome reprieve, given they had been subject to significant regulatory scrutiny and action, with a series of recent high-profile prosecutions conducted by ASIC. However, if there was any doubt that crypto market participants should take a careful and conservative approach going forward, ASIC’s decision in late June to lodge an appeal from the penalty judgment should have removed it.

Key issues

The Court considered two questions in deciding whether Block Earner should be relieved of liability for a pecuniary penalty:

• whether Block Earner had acted honestly; and
• whether Block Earner should fairly be excused from the contraventions, having regard to all the circumstances of the case.[2]

The Court made the following findings on each issue:

• Did Block Earner act honestly?

Justice Jackman was satisfied that Block Earner acted honestly for the following reasons.

First, the unchallenged evidence of Block Earner’s CEO was that at the time Earner was launched, he and his Head of Risk and Compliance had considered whether an AFSL was required and formed an honest view that Earner did not need an AFSL. Additionally, he neither intended nor understood that the Earner product was a managed investment scheme or an investment facility.

Second, Block Earner had well-documented risk management policies in place including an Enterprise Risk Management Framework which evidenced its attempts to comply with applicable laws and regulations. This together with the unchallenged evidence of the CEO meant that the court was satisfied that Block Earner concluded that there was no identified risk of Earner breaching any laws or regulations.

Third, Block Earner received legal advice in relation to the Earner product prior to issuing the product. While Block earner did not waive privilege over the advice received, Justice Jackman did not draw any adverse inference for doing so.

Further, ASIC and the Court accepted that Block Earner had acted without any deceit or conscious impropriety, and without any intent to gain an improper benefit or advantage. His Honour also found that Block Earner’s conduct was not careless or imprudent.

• Should Block Earner fairly be excused?

Block Earner relied on seven matters in support of its application to be excused from liability:

1. 1. Block Earner’s contravention should be seen as arising from an honest view about the application of technical definitions regarding financial products in the Act;
   2. that no loss or damage was suffered by investors by reason of the provision of Earner without an AFSL or without registration as a managed investment scheme;
   3. that the contravention arose in an uncertain regulatory environment where government bodies were unsure as to the extent to which the financial product regime in the Act applied to Earner;
   4. that Block Earner had received adverse and unfair media coverage as a result of the proceedings;
   5. that Block Earner had been actively involved in policy discussions with key industry participants and regulators concerning crypto-related products;
   6. that Block Earner had never been previously found by a court to have engaged in similar conduct; and
   7. the benefit obtained from Earner was modest.

Justice Jackman accepted that matters one to five favoured Block Earner’s application. Although his Honour also accepted ASIC’s submission that the contraventions involved important considerations of public policy, it was held that having regard to all of the circumstances, Block Earner ought to be excused from liability for the contravention.

His Honour placed particular emphasis on the fact that Block Earner had sought legal advice at the time of issuing the product and had formed an honest view that it was not acting in breach of any regulations. His Honour also noted the lack of clarity and predictability in the financial services provisions of the Corporations Act. His Honour referred to longstanding legal principles which have held that where the law is uncertain and a person obtains and relies on legal advice, that person should be excused from liability for a civil pecuniary penalty. Particularly in circumstances where the person does not derive a substantial profit or cause substantial harm as a result of the relevant conduct.

Grounds of appeal

ASIC has raised three grounds of appeal:

• His Honour erred in holding that Block Earner should be relieved from liability in all the circumstances.
• His Honour erred in:
  • inferring that Block Earner relied on legal advice in forming a view that there was no identified risk that the Earner product would breach any laws or regulations when it did not lead evidence to that effect;
  • giving relief from liability in circumstances where Block Earner made a profit from the contraventions;
  • holding that the regulatory complexity was a relevant consideration in circumstances in which Block Earner perceived significant uncertainty but deliberately engaged in conduct in pursuit of profits; and
  • holding that ASIC’s press release was a reason to relieve the Block Earner from liability when there was no evidence that anyone formed an erroneous belief based on that press release.
• His Honour erred in holding the view that he would not have ordered any pecuniary penalty even if he had not granted relief when considering the above, the purpose of deterrence, and the evidence not establishing that any penalty would have been oppressive.

Conclusion

This decision highlights the inherent complexities and uncertainties within the financial services provisions of the Act affecting crypto-assets. Crypto-asset issuers can take some comfort from the decision by the Court not to impose penalties, in part because of the lack of clarity and predictability around the financial services regulatory environment.

The importance the Court placed on obtaining legal advice and maintaining adequate compliance frameworks when faced with regulatory uncertainty is also notable.

ASIC’s decision to appeal, however, highlights that crypto-asset issuers and affected market participants should ensure they adopt as conservative an approach as possible in the face of regulatory uncertainty, including seeking legal advice and implementing appropriate compliance frameworks. The market should also expect ASIC to continue attempts to clarify the law as it relates to crypto products through the courts.

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Authored by: 

Edward Martin, Partner
Philip O’Brien, Senior Associate
Jin Lim, Lawyer

[1] ASIC v Web3 Ventures Pty Ltd [2024] FCA 64.

[2] Section 1317S(2) of the Act.