Token a closer look at the impact of digital asset cases on financial markets

2025 is promising to be a significant year for the digital asset ecosystem in Australia and internationally. Various important commercial and regulatory developments are already well underway across the world. In considering the opportunities that 2025 can present, it is important to consider the Australian legal and regulatory developments relevant to the digital asset ecosystem that occurred in 2024. These developments should be carefully considered, and appeals monitored, as 2025 progresses. Further, these developments are not only directly relevant to digital asset businesses, but also affect the application of Australia’s regulatory system to financial services and financial markets more generally and should not be ignored.

Since the beginning of 2024, the Federal Court has handed down four material judgments that relate to businesses involved in digital assets. In each judgment, the application of various aspects of Chapter 7 of the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) is considered. Matters such as the nature of financial products (including debentures), when exemptions from licensing apply, and when a person can be exempted from liability for contraventions of the Corporations Act, are at the core of these cases and have infrequently, if ever, been subject to prior judicial consideration. Some aspects of these judgments have resulted in unusual and unexpected outcomes. Some have been decided on limited facts, allegations and submissions. As such, the most extensive impact of these cases may lie beyond tokens and instead at the heart of some financial markets and financial services.  In certain cases, there is also a question mark as to whether different fact patterns, allegations or submissions (or indeed the contributions of an appropriate amicus curiae) might yield different results.

These cases were complemented by another decision, handed down near the end of 2024. That decision was the first of an Australian superior court outside of an interlocutory proceeding to find that a digital asset is property under Australian law.

Not only that, the Australian Securities and Investments Commission (ASIC) has also published its consultation paper, which seeks feedback on proposed updates to its guidance in Information Sheet 225 to persons offering products and services in relation to crypto and digital assets.[1] These proposed updates pertain to the application of the law relevant to digital assets and financial services in Australia, as well as the work undertaken so far by the Australian Government and Commonwealth Treasury to develop policy proposals to regulate digital asset facilities and platforms, though cannot themselves change the law without legislative change. Many of the issues considered by the Federal Court in the cases described in this alert are addressed by ASIC in its consultation paper. If you are interested in learning more about ASIC’s proposed updates to Information Sheet 225, please see our alert for a summary of the proposed changes and what they mean for the industry.

We set out key details of each case, the issues considered and how these judgments fit with the existing law. We start with the four cases relating to financial services regulation and end with the case relating to property.

Testing the application of financial services laws to digital assets

The following four cases brought by ASIC claimed that the respondent’s activities relating to digital assets contravened Australia’s existing financial services laws:

• Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 (ASIC v Web3 Ventures) and Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578 (ASIC v Web3 Ventures (Penalty)) (see KWM alert here for further details);
• Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet) (see KWM alert here for further details);
• Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 (ASIC v BPS Financial); and
• Australian Securities and Investments Commission v Bit Trade Pty Ltd [2024] FCA 953 (ASIC v Bit Trade) and Australian Securities and Investments Commission v Bit Trade Pty Ltd (No 2) [2024] FCA 1422 (ASIC v Bit Trade (Penalty)).

The coverage of these cases is broad. Taken together, the cases consider whether four different commercial offerings constitute dealing in five different financial products, providing financial product advice in respect of one such product, and offering one additional financial product under the ASIC Act. Other points to note are:

• no two cases considered a similar offering, or type of financial product;
• only one, ASIC v BPS Financial, considered whether a particular digital asset was a financial product under Chapter 7 of the Corporations Act and whether financial services were provided in respect of such an asset. All other cases considered products and services which are underpinned by digital assets and blockchain technology;
• three out of the four cases have been appealed; and
• external legal advice has played a role in at least two of the cases. A concern we observe generally in the market is the gamut of views on fundamental points of law, underscoring the relevance and value of ASIC’s engagement with members of the legal industry to develop guidance.

Detail regarding the alleged contraventions, outcomes of these first instance judgments, and the public information regarding the appeals are set out in Table 1 at the end of this article.

What does this mean…

… for regulation of the financial services industry?

Whilst these judgments appear to focus on novel, technologically driven products, the laws apply to all participants in financial markets. Key matters examined in these cases are:

• when a person is able to provide financial services under an authorised representative arrangement with the holder of an Australian financial services licence (AFSL);
• when a facility is a financial product or merely technology;
• the definition of a debenture under the Corporations Act;
• when a facility is a contract for the future provision of services, and therefore is not a derivative;
• the circumstances in which a person may be exempt from penalties for contravention of the Corporations Act under section 1317S; and
• whether a product which offered a margin extension in the form of national currency or digital assets could constitute a credit facility within the meaning of the ASIC Act for the purposes of the design and distribution obligations (DDO) regime.

Each is considered in turn below.

(a) Authorised representative arrangements

In ASIC v BPS Financial, the relevant provisions of the Corporations Act are interpreted as permitting a licensee to authorise a representative to provide any financial service for which the licensee holds a licence, subject only to the scope of the written notice authorising the representative. Downes J found that the requirement to act “on behalf of” the licensee should not be read as limiting the scope of an authorisation.[2]  This departs from a common understanding as to how these arrangements are treated, being that the requirement for the financial services to be provided by the authorised representative “on behalf” of the licensee[3] implicitly limits the financial services an authorised representative may provide to those which are able to be provided on behalf of another. In particular, as a financial product is issued by the provider,[4] this is considered to be undertaken on one’s own behalf.

If upheld, ASIC v BPS Financial could provide clear support for an expanded scope of financial services which could be provided by an authorised representative of an AFSL holder (licensee). If not, it may still clarify the scope of financial services which can be provided pursuant to an authorised representative arrangement.

(b) Definition of debenture. If the judgment in ASIC v Finder Wallet is upheld on appeal, and is followed more broadly, it may narrow the circumstances in which a product is considered to be a debenture to include only circumstances where money deposited or loaned is used as part of the working capital. This may have a significant impact on debt capital markets. Further detail of our analysis in relation to this and the current position with respect to debentures is set out in our alert here.

(c) When a contract for the future provision of services is exempt from the definition of derivative. ASIC v Web3 Ventures provides guidance regarding when an arrangement which might otherwise be a derivative is exempt because it is a contract for the future provision of services.[5]  Whilst ASIC v Web3 Ventures does not provide detail regarding the rationale for arriving at this view, as this exemption has limited judicial consideration, its successful application in this case is noteworthy, particularly as it has already been referred to in ASIC’s draft updated regulatory guide ASIC RG 236 Do I need an AFS licence to participate in carbon markets, which explains when a person is required to hold an AFSL in carbon markets. Further detail of ASIC v Web3 Ventures is in our alert here.

(d) Exemption from penalties under section 1317S of the Corporations Act. ASIC v Web3 Ventures (Penalty) is one of the few cases in which a person has successfully been relieved from liability on the grounds that they acted honestly and, having regard to all the circumstances, ought fairly to be excused from the contravention.[6]  In coming to this view, Jackman J considered evidence of Web 3 Ventures Pty Ltd (Block Earner), some of which was unchallenged, and took the following circumstances into account:

• investors did not suffer any loss or damage (although the potential risk of loss was found to be real and significant);[7]
• contraventions arose in an uncertain regulatory environment where government bodies were unsure as to the extent to which the financial product regime applied to digital asset service providers;[8]
• ASIC’s media release regarding ASIC v Web3 Ventures was “beyond the natural and probable consequences of the relevant wrongdoing”,[9] was unfair and misleading[10] and as a result, was more than adequate for general deterrence and the protection of the public from similar conduct by others;[11] and
• Block Earner’s active participation in industry bodies and policy discussions demonstrated a willingness to engage with effective ways to regulate crypto-related products and services, and supported a finding that Block Earner has, at all times, sought to conduct its business in a lawful manner and has not consciously sought to provide cryptocurrency services in a way that contravenes the Corporations Act.[12]  Note that this evidence was unchallenged.

This reasoning is subject to appeal.

In addition, to successfully rely on section 1317S, a person would usually provide evidence that they had sufficient qualifications and experience to have formed the view and/or that they had obtained legal advice that reflected that they complied with relevant laws and regulations.[13] Block Earner was found to not have these qualifications or experience, and instead relied on legal advice. However, no such advice was provided in evidence. Instead, Jackman J rather interestingly found that “it was more likely than not” that the advice received by Block Earner came to this conclusion.[14]  Unsurprisingly, this too has been appealed by ASIC.

In ASIC v Bit Trade, Bit Trade argued that relief under section 1317S should be granted if ASIC is successful, excluding any pecuniary penalty. Bit Trade indicated that if found liable, it will rely on section 1317S(2) of the Corporations Act to resist any order for the payment of a pecuniary penalty.[15] However, in ASIC v Bit Trade (Penalty), Bit Trade accepted that a pecuniary penalty should be imposed,[16] and the application of section 1317S was not considered by the Court. We discuss this judgment in the following section.

(e) Legal advice from experienced and competent lawyers is paramount. ASIC v Web3 Ventures (Penalty) emphasises the imperative of obtaining legal advice from “experienced and competent lawyers” before launching the products and services.[17]  Block Earner’s successful avoidance of any penalty, relied on it having received legal advice, that this was received prior to providing financial services and that that advice was from competent and experienced lawyers.[18]

(f) Technology used is not determinative of the financial product or services. The decision in ASIC v BPS Financial also provides guidance more broadly regarding the distinction to be made between when a facility is merely technology and when it is a financial product. Whilst the case does not state any principles in respect of this matter, Downes J was clear in distinguishing between the technology and the financial products. In doing so, her Honour found that none of the blockchain (being the “decentralised, distributed ledger that stores a record of all transactions”[19]), the node (being the computer or device which hosts a copy of the blockchain and validates transactions and propagates them across the network),[20] or the smart contract[21] was a financial product. Instead, the wallet, which was the means by which the payment was made, was considered to be the financial product, being a non-cash payment facility.[22]  This aligns with statements made over a number of years across a range of contexts that the definition of a financial product is intended to focus on the product and be flexible in its application.[23]

(g) Importance of legal structure and documentation, and application of the DDO regime. The decision in ASIC v Bit Trade demonstrates the importance of properly considering the legal structure of products and services and the legal documentation which set out the rights and obligations of the parties to the arrangement, in accordance with requirements under the financial services regime.  Under the terms of service of Bit Trade’s “Margin Extension” product, Bit Trade’s Australian customers could receive extensions of margin in the form of digital assets or legal tender to use to make spot purchases and sales of digital assets on the Kraken exchange.[24] In its decision, the Court considered whether a customer’s obligation to provide a particular type and amount of cryptocurrency where it received a margin extension in the form of digital assets could constitute a debt, and whether it would be exempt from the requirements under the DDO regime to provide a target market determination (TMD) under reg 2B(2)(a) of the Australian Securities and Investments Commission Regulations 2001 (Cth) (ASIC Regulations).[25] The Court concluded that while such an obligation does not constitute a debt, as it is not one which requires the payment of money,[26] the terms of the product also provided that a customer could receive a margin extension in national currency such as Australian or US dollars, which gives rise to a “deferred debt”.[27] As a result, Bit Trade was unable to rely on the exemption in reg 2B(3) of the ASIC Regulations as the Margin Extension product was a credit facility which involves credit of the kind described in reg 2B(3)(a). Relevantly, the Court agreed with ASIC’s submission that the contravention of the requirement to issue a TMD occurred when Bit Trade engaged in “retail product distribution conduct” in relation to the Margin Extension product without first making a TMD, and it was not relevant that some customers who agreed to the terms of the Margin Extension product did not receive Margin Extensions in US dollars or another national currency.[28]

…for enforcement against the digital asset industry?

Some particularly important aspects for those in the digital asset industry to bear in mind are:

(a) Digital assets may be financial products. Caution should be taken before drawing any conclusion from the limited scope of a particular case. In particular, simply because ASIC has not brought a case that a digital asset is a financial product should not be taken to imply that a digital asset is not a financial product and activities in respect of that digital asset are not subject to these laws. In this regard, we refer to ASIC’s proposed updates to Information Sheet 225 and the related consultation, which sets out ASIC’s views on when a digital asset or related product may be a financial product, and our alert which summarises the proposed changes and what they mean for the industry.  Similarly, the pursuit of one service in an infringement case, and not another, does not mean that the other is unregulated.

(b) Australia’s financial services and markets laws apply. In the absence of any statutory reform, Australian financial services laws will remain applicable to the digital asset industry. Given the breadth of those laws, particular attention needs to be paid to the application of financial services laws to digital asset offerings, including the application of the DDO regime and the requirements imposed on financial market participants under it.

(c) Consider how the product is described across all materials. The nature of a product is to be determined by reference to how the product is described on any website, in other materials and communications, and the precise terms under which the product is offered (irrespective of how the technology may be understood to operate). Whilst the Court in ASIC v Finder Wallet appears to have construed the terms of the contract more narrowly than ASIC v Web3 Ventures, each is a matter of construction. The decision of ASIC v Bit Trade demonstrates the complexity and nuances of requirements under the financial service regime and the importance of considering whether the legal structure and documentation describing the rights and obligations of the parties to the arrangement are in accordance with those requirements.

(d) Seek advice from experienced, competent lawyers before offering products or services. As noted above, it bears repeating that Block Earner was able to avoid penalty for its contravention on the basis that, before launching its products and services in a complex and uncertain area of law, it had received legal advice from “experienced and competent lawyers”.[29] This indicates that the time that advice is received, as well as from whom it is received are important factors to be considered.  Our view is that any advice in this sphere must combine a deep understanding of financial services laws and a strong technical understanding of the sector, assets, participants, technologies, products and services involved, to be able to apply those laws to the facts appropriately.  This is true also of other areas such as payments, carbon and traditional financial market infrastructure.

What’s next…

… in digital asset litigation?

This is not the last we will hear regarding these cases or ASIC’s enforcement against those in the digital asset space.

ASIC has appealed both ASIC v BPS Financial and ASIC v Finder Wallet, and has appealed the penalty judgment in ASIC v Web3 Ventures (Penalty). Block Earner has cross appealed the decision in ASIC v Web3 Ventures.

ASIC is also actively pursuing others in the digital asset industry. It has brought a case against Binance Australia Derivatives for offering crypto derivative products to 505 Australian retail investors who were misclassified as wholesale clients, and denying important consumer protections under Australian financial services laws. These protections include the requirement to be provided with a product disclosure statement, access to a compliant dispute resolution scheme and a TMD.[30]

ASIC is also pursuing various NGS Crypto companies, their officers, employees, agents, representatives and associated entities, for improperly dealing with funds received from Australian investors and operating a financial services business without an AFSL.[31]  A list of other actions ASIC has taken against those in the digital asset industry is set out in Annexure 2 to this article.

More generally, those in the digital asset industry should not assume that ASIC will not continue to pursue cases against those contravening the law. Although misconduct involving digital assets is no longer listed on ASIC’s enforcement priority list for 2025, ASIC has said that it will continue to take a strategic, risk-based approach to enforcement and is not afraid to pursue cases where the law might be considered unclear.[32] 

… for financial market participants?

For those seeking guidance regarding the concepts considered in these cases, it would be prudent to not place too much weight on the decisions until the appeals have proceeded through the courts. In addition, even where there is no appeal, as a judgment of first instance, caution should be exercised before seeking to rely on any case as a statement of law applicable broadly.  We note that these comments primarily relate to decisions that point to a highly permissive (minimally regulated) approach.  Ignoring a conservative outcome – even if preliminary – is far riskier.

Finally, central to these cases is the importance of ensuring clarity in the products and services offered and proper legal advice is obtained. Failure to consider the legal aspects of a product offering, whether it be failure to receive advice, ensure clarity and consistency of terms, and have fully considered and established the arrangements through which a person is able to provide financial products and services, leaves any business open to significant risk.

If you are interested in considering the application of this highly nuanced area to any new or innovative offering, or the impact that these cases may have on your existing business, please do not hesitate to reach out to our team. We would be delighted to assist.

…for the future of regulating digital assets?

We are aware that many digital asset sector participants are in a holding patten of sorts in multiple markets, waiting for new laws and new guidance before crystallising their strategy.  Many are also trying to balance the interests of business development with their legal obligations, which is especially challenging when market practice differs so broadly.  

These cases and any new laws give rise to an opportunity to raise the standard for the digital asset industry, and create opportunities for financial market participants to engage with distributed ledger technologies.

Digital asset industry participants should consider how they may meet existing obligations as those who do will have an advantage to set the standard imposed on others. This is particularly important as statements indicate that any new laws imposed on participants in the digital asset industry may be imposed in addition to, and not instead of, existing financial services laws.[33] The interaction between any new laws and existing obligations will require careful consideration by all. Whilst new laws may provide clarity, they may not result in a simpler regulatory framework.

Any person in traditional financial services looking to leverage distributed ledger technologies to deliver financial services should also pay close attention to these developments. Greater clarity can assist to facilitate using innovative infrastructure to deliver traditional financial products and services, and operate market infrastructure.

We also consider it is a good time to speak to regulators about go-forward plans.  Many have increasingly sophisticated digital asset teams and are eager to attract regulated businesses into the fold. 

Finally, an Australian decision on digital assets and property

Whilst it has been the subject of judicial and legal academic thinking internationally, none of the Federal Court cases discussed above have considered whether a digital asset is property. In particular, it was expressed to not be necessary to form a view on whether a digital asset is property to resolve ASIC v Web3 Ventures.[34] This follows previous Australian cases where parties agreed to treat digital assets as property, and so judicial consideration was not necessary.

It was not until the very recent Victorian Supreme Court decision of In the matter of Blockchain Tech Pty Ltd [2024] VSC 690 (Blockchain Tech) that an Australian court considered whether a digital asset could be capable of being property under Australian law outside of an interlocutory application.[35] In its decision, the Court held that an interest in bitcoin is a chose in action (and not a chose in possession on the basis that bitcoin cannot be possessed), and therefore constitutes property under Australian law.[36]

The Court also found that an interest in bitcoin was property under Australian law and could be the subject of a trust. Its reasoning was based on the application of foundational decisions that considered the meaning of property under Australian law as well as international decisions which considered the status of digital assets as property. Most relevantly, the Court found:

• that a person’s interest in bitcoin has the necessary degree of permanence or stability to be property,
• that it does not matter that a person’s interest in bitcoin is not actually transferred in a transaction (because a new record replaces the previous one),
• that an interest in bitcoin is more than mere information because it includes the power to undertake transactions on a network and to exclude others from dealing with the bitcoin.

The Court also found that an interest in bitcoin could not be the subject of a bailment because it is intangible and could not be possessed.

Interestingly, for those following legal developments in the United Kingdom, the Court found that an interest in bitcoin was a chose in action and no third category of property beyond choses in possession and choses in action is needed under Australian law. This is because Australian courts have already recognised a broad category of rights as being choses in action, without the need for the rights to be legally enforceable.

This can be contrasted with the English High Court decision of D’Aloia v Persons Unknown [2024] EWHC 2342 (Ch) (D’Aloia), in which the Court considered, among other things, whether USDT (a US dollar stablecoin) was capable of constituting property. In its judgment, the Court held that USDT is capable of attracting property rights for the purposes of English law while (having regard to the very limited facts presented to the Court) being neither a chose in possession nor a chose in action and is a distinct form of property not premised on an underlying legal right.[37] The Court further stated that “those rights attach to the USDT itself, rather than the right to control it, for example the right to use the private key.”[38]  The Court’s view that digital assets are a type of property distinct from a chose in action was on the basis that the property rights conferred by a digital asset itself are enforced by the cryptographic systems that underpin the digital asset, rather than enforced through proceedings.[39]

In the long term, this distinction between the Australian and UK reasoning may not be of practical significance. However, the decision in Blockchain Tech supports there being little need for an equivalent to the United Kingdom’s Property (Digital Assets etc) Bill 2024 (UK) in Australia.

Annexure 1 – Key 2024 Digital Asset Federal Court cases

Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 (ASIC v Web3 Ventures) (see KWM alert here for further details) 
and 
Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578 (ASIC v Web3 Ventures (Penalty))

Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet) (see KWM alert here for further details)

Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457 (ASIC v BPS Financial)

Australian Securities and Investments Commission v Bit Trade Pty Ltd [2024] FCA 953 (ASIC v Bit Trade)
and
Australian Securities and Investments Commission v Bit Trade Pty Ltd (No 2) [2024] FCA 1422 (ASIC v Bit Trade (Penalty))

Annexure 2 - Other ASIC action

The cases in the Federal Court are not the totality of ASIC’s activity in the digital asset space. In addition to issuing various notices to digital asset businesses, it has secured enforceable undertakings, stop orders and in one instance, a criminal conviction, against individuals and businesses.

A table of these cases is set out below.