Increased regulatory action for crypto product representations
Cryptocurrency is steadily gaining popularity in Australia. Swyftfx’s 2023 survey run by YouGov reported that cryptocurrency adoption in Australia had risen to 23% (up from 17% in 2021), – the 8th highest adoption rate in the world. However, investment in digital assets brings risks for consumers, being labelled a “high-risk investment” by the Federal Government’s Moneysmart website due to the volatility of its value and the limited regulation within the market.
While a robust regulatory framework around cryptocurrency continues to emerge, ASIC has this year been focusing on crypto companies for unlawful or misleading behaviour. The most recent of these actions being their penalisation of fintech company Bobbob Pty Ltd in September due to alleged misleading representations the company made regarding a crypto-asset linked investment product. The representations contravened section 12DB(1)(e) of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) that prohibits “making a false or misleading representation with respect to the approval of services.”
In this case, ASIC had become concerned that a number of Bobbob’s representations had the potential to be misleading to consumers, including that the representations were approved or licensed by ASIC, that the investment product was similar to a bank account, that the investment was low-risk, safe and stable, and that all customers would achieve a competitive interest rate.
Roughly 700 customers were impacted, with the deposited funds totaling approximately $1.6 million dollars over the eight-month period the product was offered.
As a result of these representations, Bobbob was forced to pay $53,280 in infringement notices, as well as return all customers’ funds with interest.
Further action by ASIC
Interactive Brokers Australia Pty Ltd, an online trading company, was fined $832,500 by ASIC for negligence and recklessness in failing to identify suspicious trading conducted by one of its clients. The higher cost of the fine was due to Interactive Brokers’ role as a market participant, meaning the company was meant to play a gatekeeper role in detecting and preventing suspicious trading.
In September 2023, ASIC fined Bit Trade Pty Ltd, a crypto exchange company, for failing to comply with design and distribution obligations for the margin trading product it offered Australian customers on their Kraken crypto exchange.
Regulatory developments
Further to our article of October 2022, discussing the proposed Digital Assets (Market Regulation) Bill, the bill was referred to the Economics Legislation Committee for inquiry and report on 2 August 2023. Various extensions of time to report have been sought and, as yet, no report has been published.
On 16 October 2023 the Federal Government released a proposal paper that will look to make, among others, the following changes:
- Making crypto exchanges and digital asset platforms subject to existing Australian financial services laws and requiring platform operators to obtain an Australian Financial Services License.
- Digital asset platforms will need to meet specific obligations that take into account the nature of the platforms. This will include minimum standards for holding tokens, standards for custody software, and standards when transacting in tokens.
These obligations are inspired by frameworks used to regulate digital asset platforms in jurisdictions like the EU, UK, Canada, and Singapore.
Industry participants and stakeholders have been invited to provide submission on the proposal by 1 December 2023 here with further consultation on draft legislation in 2024.
Risk transfer regarding crypto assets
Australia’s high rate of adoption of digital assets has invariably led to enhanced focus on associated insurance needs. Absent formal regulation and a definition of the terms of reference as regards the owning, trading and sale of digital assets, there remains limited insurer appetite to cover losses in connection with digital assets.
Our previously raised comments that regulated insurers are unlikely to deploy capital into operators and service providers in this space until the regulatory landscape is implemented continue to ring true.
As regards financial services professionals in which Bellrock advises:
- Financial advisers: In most instances, policies have a nexus as between covered financial services in connection with the licensees’ “approved product list”. On that basis, professional indemnity cover for advice in connection with digital assets would be excluded (as it cannot be considered a financial product per the above).
- Investment managers: Most insurers exclude coverage, by express endorsement, for any claim or loss in connection with cryptocurrency. These exclusions may be applied to combined or stand-alone investment managers’ policies (professional indemnity, crime and directors’ and officers’ liability) and cyber insurance policies.
There has been some insurer interest in offering limited coverage for financial services professionals. It remains to be seen how insurance markets deal with the emerging demand for products that afford protections to those businesses dealing with digital assets. In time the Government may recommend or mandate that financial institutions maintain insurance coverage responding to financial losses suffered by their clients through investments in or the holding of digital assets.
For further information relating to risk transfer for digital assets, please contact a Bellrock advisor via the form below.
