ASIC v Finder Wallet - is a Crypto Asset investment product a debenture?

In brief:

This series examines the interface between new digital assets, related investments and the current financial services regulatory regime which has not been purpose built to pragmatically and adequately respond to novel digital asset investment products such as crypto assets and in a manner which might be otherwise contemplated by the regulator. It raises questions as to the utility of current regulatory framework and its ability to respond to innovation.

Background

The decision in Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (ASIC v Finder Wallet), is significant as it represents ASIC's continuing efforts to capture and regulate issuers of crypto-assets and crypto-related investment products, intermediary services for crypto-assets and crypto-asset exchange and trading platforms within the scope of the current financial services framework, despite its lack of alignment.

The central question in the ASIC v Finder Wallet proceedings was whether a crypto-asset related product called “Finder Earn”, which was marketed and issued by Finder Wallet Pty Ltd, was a 'debenture' for the purposes of the Corporations Act 2001(Cth) and therefore captured by the financial services regulatory framework.
 
In this regard, ASIC contended it was a debenture on the basis that a customer deposited money with Finder Wallet for use within the Finder Earn product on the understanding that their money deposited would ultimately be repaid, together with a return for allowing Finder Wallet to use their capital.

The Finder Earn product was in essence a fixed return investment product in which customers converted money (AUD) deposited with Finder Wallet (a digital asset and trading service) into TrueAUD (a stablecoin cryptocurrency based on AUD) on the promise that the TrueAUD converted plus a fixed return of 4.01% p.a interest would be returned to the customer's account and subsequently converted back to AUD and repaid at end of term.

Importantly, customers did not have any rights to or legal ownership of the TrueAUD upon the initial conversion occurring and their sole right was to ultimately receive the AUD converted plus the fixed return back into their Finder Wallet account.

The Court's Decision

The Federal Court ultimately did not agree with ASIC and found that the crypto product Finder Earn was not a debenture.
 
Significantly, the Court applied the approach of the Full Court in ABN AMRO Bank v Bathurst Regional Council 224 FCR 1 (ABN AMRO v Bathurst) which emphasised that a debenture must have the characteristic of a loan to the company repayable as a debt and be made in connection with the company's working capital.
 
In ASIC v Finder Wallet, the Court found that the Finder Earn product did not have a sufficient nexus to the Company's working capital and instead was used to "promote the growth and use of the Finder App which offered a range of services as well as giving customers an opportunity to sell their cryptocurrency to Finder Wallet and earn a return".
 
The Court also adopted a traditional commercial view of the character of a debenture by focussing on its common financial market context and found that Finder Wallet's obligation to return an amount of cryptocurrency plus the accrued return, then to convert that cryptocurrency into AUD in the customer's account with an undertaking to repay the AUD which had been deposited by the customer was "different from that which is contemplated by the usual fundraising activities traditionally associated with the issue of debentures".

Key takeaways

Importantly, in the wider context of Australia's financial markets which are regulated under the Financial Services Regime, the decision on whether the Finder Earn crypto product is captured within the definition of 'debenture' carries an inherent risk that judicial decisions regarding the application of conventional concepts in current financial markets to unconventional investment markets may modify the meaning of financial instruments such as a debenture and thus impact on conventional markets in an unforeseen manner.

Another conundrum of the decision is that the Court restricted itself to ASIC's pleaded case that the Finder Earn product was a 'debenture', and hence ruled out consideration of alternative ways that the wider financial services regime may apply or capture novel cryptocurrency investment products such as Finder Earn. The decision does not otherwise canvass or consider in detail the scope of other types of debt instruments which may be captured under the definition of debenture in the context of financial product regulation.

As a consequence of this 'commercial' interpretation, it is not surprising the principal case is under appeal by ASIC (which will be covered in a further article in this series).

Our next article in this series on the ASIC v Finder Wallet decision and regulation of crypto asset investment will consider and comment in more detail on ASIC's regulatory contentions and Finder Wallet's response and the Court's view of ASIC's interpretation.