The Modern World Of Trade

ASIC has released guidelines in relation to the challenges faced by product issuers and exchange market operators who offer crypto-asset investment products such as Bitcoin. Links to ASIC’s guidelines can be located here.

Crypto-asset investments

On 29 October 2021, ASIC released their updated guidelines in relation to how crypto-assets such as Bitcoin and Ethereum may become eligible as underlying assets for exchange traded products. These guidelines mean that digital assets such as cryptocurrency may become more accessible, allowing investors to purchase various interests in crypto-assets through an investment firm with peace of mind that certain standards are met, including in terms of the quality of the asset, and disclosure obligations.

ASIC’s guidelines set out information in relation to the best practices for product issuers and for market operators such as the ASX. These best practice guidelines assist by defining existing obligations in the trade of crypto-assets, thus ensuring a level of confidence for people or entities looking to invest in crypto-assets.

The process of introducing crypto-assets into the ASX market began in June 2021, when ASIC released a public consultation providing proposals to establish good practices for crypto-assets to be traded. Following over 30 submissions in response to the public consultation, ASIC released a further report in consideration of the responses.

On 20 October 2021, a Final Report from the Senate Select Committee on Australia as a Technology and Financial Centre was released, detailing recommendations in relation to the development of an Australian regulatory framework for crypto-assets, including the introduction of a ‘crypto-asset’ category in the application for a licence for responsible entities.

Given the distinct risks which are attached to crypto-investments, product issuers and market operators must ensure that they consider how they will meet their existing regulatory obligations “in a way that maintains investor protections and Australia’s fair, orderly and transparent markets”, as stated by ASIC Commissioner Cathie Armour.

Why are ASIC’s guidelines necessary?

The purpose of ASIC’s guidelines is two-fold. The guidelines provide guidance:

  • To product issuers, in relation to how they may introduce crypto-assets to their offered investment products via the investment exchange market; and
  • To licensed Australian exchange market operators, to assess which crypto-assets are acceptable for EFT

whilst assisting to ensure that compliance with their respective legislative obligations, including under the Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, are maintained. 

Given that crypto-currency is a relatively new, ever changing intangible asset, it is essential that responsible entities ensure risk management strategies are established and continue to be developed when offering crypto-assets to investors. Responsible entities should set out information which would be reasonably required by an investor to decide about whether to purchase a financial product or not in Product Disclosure Statements. This information might include:

  • The characteristics of the crypto-asset being offered:
    • The technology underpinning the crypto-asset;
    • How they are created, transferred and destroyed;
    • How they are valued and traded; and
    • How they are held.
  • The risks associated with the crypto-asset:
    • Market risk (volatility of the asset);
    • Pricing risk (the accuracy and reliability of value attributed to the asset due to factors such as susceptibility to manipulation);
    • Immutability (the inability to unilaterally reverse incorrect or unauthorised transfers);
    • Political, regulatory and legal risk (that government and / or regulatory action may affect the value of the asset);
    • Custody risk (that the asset may become inaccessible or be accessed by unauthorised third parties);
    • Cyber risk (susceptibility to cyber crime); and
    • Environmental impact (increased market regulation or negative market sentiment associated with the perceived environmental impact of the asset).
  • How the crypto-asset is intended to operate.

  • How the crypto-asset is expected to generate a return for investors.

ASIC’s guidelines further assist by drawing attention to the broad range of circumstances where misleading or deceptive conduct is legislated against in the context of crypto-asset investments. This legislated obligation not to mislead or deceive may stretch as far as to apply in the context of advertisements, and where an interest in crypto-assets or an initial coin offering (ICO) are issued, traded or sold outside of Australia, regardless of whether the crypto-asset or ICO is categorised as a financial product.

Lavan Comment

The call for the inclusion of crypto-assets into Australian financial products and the exchange market has brought about an evolving regulatory space, and a more burdensome obligation upon product issuers to ensure they have the proper expertise, risk management processes and resources to remain compliant with Australian legislation should they wish to offer crypto investment assets. 

Failure to comply with legislated obligations can have serious consequences for product issuers and exchange market facilitators alike. 

As with anything, unprecedented territory can pose unforeseen challenges and risks. If you have any queries in relation to your obligations as a product issuer or market operator, or you would like to discuss how ASIC’s recent guidance affects you, please contact Cinzia Donald.