ASIC v Finder Wallet: the meaning for markets beyond crypto

On 14 March 2024, the Federal Court found that Finder Wallet Pty Ltd (Finder Wallet) did not contravene financial services regulatory obligations under the Corporations Act 2001 (Cth) (Corporations Act) in making its “Finder Earn” digital asset product available. 

Notably, ASIC pursued the case against Finder Wallet in a different way to the recent case brought against Web3 Ventures Pty Ltd (Web3 Ventures). In the case against Web3 Ventures, ASIC argued that the relevant facilities were each an interest in a managed investment scheme, a derivative or a facility through which a person makes a financial investment.  However, in its case against Finder Wallet, ASIC restricted its pleading to a case based on characterisation of the “Finder Earn” product as a “debenture” under the Corporations Act. Whether the Finder Earn product could be characterised as some other kind of financial product was not in issue. In its decision, Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet), the court restricted itself to the pleaded case and found that the Finder Earn product was not a debenture. For more information about Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 (ASIC v Web3 Ventures), see our insight here.

As with the previous case, ASIC v Finder Wallet finds that not all products involving digital assets are regulated financial products.  It also shows the complexity of Australian financial services laws and the intricacies relevant to determining whether they are applicable to novel products.  Indeed, the application of the case to the meaning of “debenture” has potential to apply to the Australian financial markets well beyond the digital asset market.

This may not be the last we hear of ASIC v Finder Wallet as ASIC has noted that it has 28 days in which to lodge an appeal and will consider the judgment carefully.[1]

Author’s Note 11/4/2024: On 10 April 2024, ASIC lodged a Notice of Appeal in the Federal Court to appeal the decision to dismiss proceedings against Finder Wallet. 

Key takeaways

We set out the key takeaways for the meaning of debenture in Australian financial markets and those more specifically for the digital asset markets below.

Meaning of debenture in Australian financial markets

The meaning of debenture in the Corporations Act was at the heart of the ASIC v Finder Wallet decision and it is this aspect of the decision that should be of most interest to the broader financial markets.  In particular, the case placed heavy reliance on ABN AMRO Bank v Bathurst Regional Council[2] (ABN AMRO v Bathurst), an earlier decision relating to highly complex financial instruments, and applied its principles in a very different context. 

ASIC v Finder Wallet involved customers depositing Australian dollar funds into an account with Finder Wallet (their Finder Wallet Account), acquiring digital assets by exchanging Australian dollars for them, and transferring those digital assets to Finder Wallet.  Finder Wallet promised the customer would, in return, receive the equivalent amount of those digital assets plus a fixed return into their Finder Wallet Account.  The customer could request to be paid the Australian dollar value of those digital assets in their Finder Wallet Account.

The court found that two of the critical elements of a debenture were not satisfied:

• No money deposited or lent. The funds provided by a customer into the Finder Wallet Account for the purpose of acquiring the digital assets or investing in the related digital asset product were not “deposited or lent to” Finder Wallet “in the way envisaged” by the Corporations Act. Instead, the court found that these funds were used to purchase the digital assets (which the court obliquely referred to as a “species of property”), which were then loaned to Finder Wallet. 
• No undertaking to repay. The obligation of Finder Wallet to pay the customer the amount in Australian dollars equal to the value of the digital assets in the customer’s account was not an undertaking to repay money deposited or lent to Finder Wallet.  The court’s reasoning relied on the decision in ABN AMRO v Bathurst which found that this undertaking required that the debt comprised a loan made to a company “as part of its working capital”.[3]  This was despite the usage of terminology such as “loans” and “lending” in relation to Finder Wallet because the Court found that the obligation to repay the digital asset was “different from that which is contemplated by the usual fundraising activities traditionally associated with the issue of debentures”.[4]

From one perspective, the end result might not be surprising if translated to a more common financial market context.  However, the reiteration of the principles applied in ABN AMRO v Bathurst in the completely different context in ASIC v Finder Wallet indicates that those principles are not confined to highly structured credit-linked notes.  Accordingly, it is important that market participants are reminded of these principles:

• Common law meaning of debenture remains relevant. The court in ABN AMRO v Bathurst noted that the purpose of the definition of debenture in the Corporations Act was “intended to facilitate electronic commerce in debentures by focussing on the legal right to repayment of the debt rather than the piece of paper which evidenced it”.[5] The definition should not have “drastically altered the nature of a commercial instrument as understood for many generations”.[6] Accordingly, the common law principles applicable to the meaning of debenture remain (despite the wording in the Corporations Act purporting to comprise an exclusive definition).
• Funding working capital is an important purpose. The court in ABN AMRO v Bathurst noted the historical context of debentures being inextricably bound up with its function in corporate fundraising.  Accordingly, the court stated that it is evident that the words “to repay as a debt money deposited with or lent to” import the notion of an undertaking to repay a debt comprising a loan made to the company as part of its working capital and considered the usual fundraising activities traditionally associated with the issue of debentures and the nature of obligations which are ordinarily involved in the repayment of a loan (even one which is limited in recourse) to be relevant.[7]  In ABN AMRO v Bathurst, the court was not comfortable that an instrument which provides for redemption of a loan, at a time and in an amount, contingent upon the performance of a derivative was itself a debenture (as distinct from, for example, a loan where the funds borrowed are to be used in the business of the company to generate the funds to repay the loan).[8]
• Only some contingent debts can be debentures. The court noted that the debt owed under a debenture could be repayable under a contingency (this is clearly contemplated by another section of the Corporations Act) and that limited recourse borrowings could, in certain circumstances, comprise debentures.  However, the court found that this did not include amounts “dependent on something that is separate from the conduct of the operations of the business of the company that received the loan”.[9]
• The terms used in the instrument are influential. The court found that the use of the word “notes” was not indicative of an intention to create a debenture and noted that “promissory notes” would not normally be debentures.[10]

Some of these principles might be difficult to align with modern capital markets practice in particular wholesale contexts.  If the decision in ASIC v Finder Wallet is taken as confirmation that ABN AMRO v Bathurst could be of more general application, beyond highly complex financial instruments, then consideration is warranted by participants in the broader Australian debt capital markets.

Regulation of digital assets in Australia

The key takeaways from the ASIC v Finder Wallet decision for those engaged in the digital asset markets include:

• Different products can be regulated differently. As with ASIC v Web3 Ventures, this case demonstrates that not all products involving digital assets are financial products.  It also shows the complexity of Australian financial services laws and the intricacies relevant to determining whether they are applicable to novel products. 
• The facts, and particularly the terms, matter. The application of the financial services regime is fact specific. The court relied solely on the terms, and not other representations, to arrive at a view that Finder Earn was not a debenture. Different or unclear terms may have yielded a different result.

Also, as mentioned above, the court made an oblique reference to the relevant digital asset comprising a species of property.  This should not be regarded as applying to all digital assets in all contexts, but each reference by an Australian court to a particular digital asset constituting property is worth noting.

What’s next?

Digital assets and financial services are an area of interest for ASIC. As noted, this judgment follows last month’s Federal Court judgment in respect of ASIC v Web3 Ventures. ASIC also has other cases before the federal courts and may well appeal this one.

If you have any questions in relation to the judgment, the application of the financial services regime to your activities or anything else, please reach out to the KWM team.

Read on for a rundown of the facts of the ASIC v Finder Wallet case, and a summary of Markovic J’s findings in relation to the Finder Earn product.

ASIC v Finder Wallet

On 15 December 2022, the Australian Securities and Investments Commission (ASIC) commenced proceedings in the Federal Court of Australia against Finder Wallet alleging that the Finder Earn product marketed and issued by Finder Wallet is a debenture and that Finder Wallet had contravened the Corporations Act in the following ways:

1. making an offer of a debenture without lodging a disclosure document with ASIC[11] or having an accompanying disclosure document;[12]
2. failing to make a target market determination[13] before engaging in retail product distribution conduct;[14] and
3. carrying on a financial services business without holding an Australian financial services licence (AFSL).[15]

ASIC also sought orders that Finder Wallet pay pecuniary penalties.

Finder Earn

Finder Earn was a product offered by Finder Wallet that allowed customers to receive a fixed rate of return in exchange for providing TrueAUD, a digital asset which is a stablecoin “pegged” to the Australian dollar (AUD), to Finder Wallet under Finder Earn’s terms of use (Terms).

To participate in the Finder Earn product, a customer was required to:

1. download the Finder App, and apply for an account with Finder Wallet to access the digital currency exchange provided by it;[16]
2. deposit AUD into their Finder Wallet Account;[17]
3. acquire a “beneficial interest in”[18] TrueAUD by exchanging AUD in the Finder Wallet Account[19] and transfer that beneficial interest to Finder Wallet.

In exchange, the customer would receive a contractual right to receive an equivalent amount of TrueAUD back, and a return in TrueAUD calculated in accordance with the fixed rate published at the time of entering into the arrangement.[20]

At the end of the term, Finder Wallet would return an amount of AUD to the customer’s Finder Wallet Account that was equivalent to the amount of TrueAUD and the return.

Decision

The court found that the Finder Earn product did not constitute a debenture. The court ordered that the proceedings be dismissed and that ASIC pay Finder Wallet’s costs.[21]

Further detail in relation to Markovic J’s reasons is set out in the table below.

Was Finder Earn a debenture?

The court found that Finder Earn was not a debenture for the purposes of the Corporations Act. To arrive at this view, the court considered the definition of debenture in section 9 of the Corporations Act which it considered “modified” [22] the definition at common law and applied the decision in ABN AMRO v Bathurst.

To determine whether Finder Earn was a debenture, Markovic J asked the following questions:

1. Is there a chose in action?
2. Was there money deposited with or loaned to Finder Wallet?
3. If so, was there an undertaking by Finder Wallet to repay moneys deposited or lent as a debt?

The table below sets out Markovic J’s findings in respect of each of these questions.