Crypto Firm’s Arguments Upheld on Appeal in Australia – Where to from here?

Australian Securities and Investments Commission v Web3 Ventures Pty Ltd

On 22 April 2025, the Full Court of the Federal Court of Australia handed down its decision in Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (ASIC) v Web3 Ventures Pty Ltd [2025] FCAFC 58. The decision considered whether certain cryptocurrency-related products were “financial products” within the meaning of the Corporations Act 2001 (Cth) (Act) and concluded that they were not. This decision reverses the decision the primary judge on 9 February 2024 in Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64. In doing so, the Full Court favoured a more limited regulatory perimeter than the primary judge for those cryptocurrency-related products under the Act, in the context of the facts of this case. If they were financial products, the crypto firm would have been found to have contravened the Act by issuing those products without holding an Australian Financial Services Licence. In the ordinary course, ASIC has 28 days from the date of the Full Court’s judgment to seek special leave from the High Court of Australia to appeal against that judgment. Special leave is not granted as of right.

The facts giving rise to the case, and the decision of the Full Court, are set out further below.

Background

Web3 Ventures Pty Ltd trading as Block Earner (Block Earner) is presently an active business offering various crypto asset-related products through its platform. In 2022, the products that Block Earner offered through its platform included two products respectively known as Earner and Access. The Earner product was offered between 17 March 2022 and 16 November 2022 and allowed customers to loan specified cryptocurrency to Block Earner in return for interest paid at a fixed rate. The case by ASIC in respect of the Access product was dismissed and not subject to the appeal to the Full Court.

Customers could use the Block Earner platform and the Earner product by registering an account with Block Earner. Block Earner explained the fixed yield generated by the Earner product on its website by stating that, “Deposits into the Block Earner 7% fixed option automatically convert your Australian dollars into the USD-backed stablecoin (USDC) via our exchange services and these stablecoins are then lent to us…Block Earner is able to generate returns by pooling customer funds and lending it to our trusted partners, who are all vetted in accordance with our risk policy, thereby receiving a favourable yield rate.” This statement was altered at some time in May 2022, the main alteration being the removal of the final sentence of the statement (commencing with the words “Block Earner is able to generate returns by pooling customer funds…”).

The Earner product was provided pursuant to Block Earner’s terms and conditions (Terms of Use), which included, relevantly, that when a customer loaned cryptocurrency to Block Earner, it transferred all rights and title in that cryptocurrency and acknowledged Block Earner could use the cryptocurrency without limitation at its own discretion. Block Earner used the loaned cryptocurrency to generate income by lending it to third parties, and under the Terms of Use Block Earner was required to pay the fixed interest rate to users regardless of the amount of income it earned in relation to the cryptocurrency the subject of the loan.

In the typical case, a customer – who had already deposited Australian dollars into an account with an Australian bank in Block Earner’s name – would nominate an eligible cryptocurrency into which Block Earner was to convert the customer’s Australian dollars. That cryptocurrency would be loaned by the customer to Block Earner. At the end of the loan term, the customer was entitled to a return of Australian dollars calculated by reference to the price of the relevant amount of cryptocurrency loaned to Block Earner, plus the fixed rate return.

The key issues

Section 911A of the Act makes it an offence to carry on a financial services business (e.g. by issuing or dealing in a financial product) without holding an Australian Financial Services Licence (AFSL). ASIC commenced proceedings alleging that Block Earner was in breach of section 911A of the Act because it was carrying on a financial services business without holding an AFSL. This was in turn based on ASIC’s allegation that the Earner product was a financial product under the Act because the product was:

1. a managed investment scheme within the meaning of section 9 of the Act;
2. a facility by which a person made a financial investment within the meaning of section 763B of the Act; and
3. a derivative within the meaning of section 761D of the Act.

ASIC also alleged that Block Earner had contravened section 601ED(1) of the Act by operating a managed investment scheme that was not registered under section 601EB.

The facts were agreed by both ASIC and Block Earner. The litigants differed only in respect of their legal analysis of the nature of the Earner product.

The decision at first instance

Managed Investment Scheme

As defined in section 9 of the Act, a managed investment scheme has the following features:

1. people contribute money (or money’s worth) in consideration for the acquisition of rights to benefits produced by the scheme;
2. any of the contributions are pooled or used in a common enterprise to produce financial benefits, or benefits consisting of rights or interests in property, for the scheme members; and
3. the members have no day-to-day control over the operation of the scheme.

The primary judge (Jackman J) found that the Earner product was a managed investment scheme. On appeal, Block Earner challenged the following conclusions of His Honour:

1. Feature 1 (people contribute money or money’s worth to acquire rights to benefits produced by the scheme) was satisfied because:
   1. a customer’s loan of cryptocurrency to Block owner was made “in return” for a fixed interest rate;
   2. that return to the customer did not fluctuate according to the fortunes of Block Earner; and
   3. the loan of the cryptocurrency caused the direct acquisition of the right to the promised fixed interest yield.

2. Feature 2 (all contributions pooled or used in a common enterprise to produce benefits) was satisfied because:
   1. for at least part of the relevant period, Block Earner’s website made it clear that there would be a “pooling” of customers’ funds;
   2. the purpose of the pooling appeared to be to generate the fixed yield that weas promised to the customers; and
   3. the payment of the fixed yield appeared to be the direct financial benefit passed on to the customers as a result of the pooling of the loans.

Financial investment

A facility through which, or through the acquisition of which, a person makes a financial investment is a financial product under the general definition set out in section 763A of the Act. Under section 763B of the Act, a person makes a financial investment if they give the money (or money’s worth) to another person, the investor has no day-to-day control of the contribution, and any of the following apply:

1. the other person uses the contribution to generate a financial return, or other benefit, for the investor;
2. the investor intends that the other person will use the contribution to generate a financial return, or other benefit, for the investor; or
3. the other person intends that the contribution will be used to generate a financial return, or other benefit, for the investor.

The primary judge held that the Earner product was a financial investment because Block Earner used the money or money’s worth to generate revenue from which it would be able to pay the fixed yield which it was legally obliged to pay. Jackman J further held that the evidence established that it was both the intention of Block Earner and the likely intention of its customers that the contributions would be used in that way.

Derivative

A derivative is a specific inclusion as a thing that is a financial product, under section 764A(1)(c) of the Act. Under section 761D of the Act, a derivative is an arrangement in relation to which the following conditions are satisfied:

1. under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and
2. that future time is not less than the number of days, prescribed by regulations made for the purposes of this paragraph, after the day on which the arrangement is entered into; and
3. the amount of the consideration, or the value of the arrangement, is ultimately determined, derived from, or varies by reference to (wholly or in part), the value or amount of something else including, for example, one or more of the following:

1. 1. an asset;
   2. a rate (including an interest rate or exchange rate);
   3. an index; or
   4. a commodity.

Because the primary judge found that the Earner product was a managed investment scheme, his Honour did not need to address whether the product was a derivative.

The Full Court’s decision

The Full Court reversed the primary judge’s findings. It held that the Earner product was neither a managed investment scheme, nor a financial investment.  Additionally, it held that the Earner product was not a derivative. Therefore, Block Earner was not unlawfully carrying on a financial services business without an AFSL. The reasons for the decision are set out further below.

Managed investment scheme

The Full Court noted that the Terms of Use provided that the cryptocurrency was being “loaned” in return for daily interest payments denominated in that same cryptocurrency. As a result, the Court held that the only relevant right acquired by customers under the Terms of Use was the right to payment of the Final Amount upon termination of the loan. That Final Amount was the amount of the borrowed cryptocurrency plus the accrued interest.

The Full Court also noted that the Terms of Use provided that, “by participating in Lend, you do not intend for Block Earner to use the loaned Eligible Cryptocurrency to generate a financial benefit or act as an investment for you […] any benefit gained or loss incurred by Block Earner’s use of the loaned Eligible Cryptocurrency will not be passed onto you.” While the primary judge held that the text on Block Earner’s website made it clear that the contributions were to be pooled, the Court held that the Terms of Use were unambiguous in that there was objectively no intention for the loaned cryptocurrency to be pooled for the purpose of generating financial benefit. It was held that while the word “pooling” may have been used on the website (at least until May 2022 when the wording on the website was changed), that did not extend to pooling for the purpose of producing financial benefits for the members.

The Full Court also held that the primary judge erred in finding that customers contributed money jointly with all users to acquire the right to the promised fixed interest yield. This is because the extract from the Terms of Use cited above defined the applicable legal relationship between Block Earner and its customers on this point. The statement on the website in relation to pooling and the linkage between the loan to Block Earner and its on-loan to third parties (relied on by the primary judge and set out earlier in this article under the heading “Background”) was not determinative. Further, the statement on the website, “did not, properly construed, represent that interest would be paid from, or that customers had a right to participate in, the benefits of Block Earner’s own lending activities [to third parties].” The statement “did not represent that there was a link between the return on customers’ loans and the performance of Block Earner’s lending activities, nor did it describe a right vested in customers to the benefits of Block Earner’s own lending activities.” The proper construction of the relationship between the customers and Block Earner was therefore an ordinary loan of cryptocurrency, granting customers a contractual entitlement to repayment of the cryptocurrency, plus interest.

Financial investment

The unchallenged evidence was that, “Block Earner’s business model was to loan the cryptocurrency borrowed from users, together with its own cryptocurrency that it had purchased from other sources, to third parties at a higher interest rate than it was paying to Block Earner’s users under the ‘Terms of use’. Block Earner’s profit was then the difference between the amount of interest it had to pay to the user and the amount it received from the third party. This profit was not paid to the user, who only received the fixed interest rate in cryptocurrency as agreed with Block Earner.” Having regard to that evidence, the Court held that Block Earner used the money to generate a financial return for itself, and to benefit itself. It did not use those contributions to generate a financial return or other benefit for the investors, in circumstances where the investors’ fixed interest return was not necessarily linked to the profit generated by the loaned cryptocurrency.

Further, upon an analysis of the Terms of Use, the Court found that no customer could possibly be taken to have believed that they intended that Block Earner would use their contribution to generate a financial return or other benefit for them, as it was set out expressly in the Terms of Use that that was not the intention.

Accordingly, the Court rejected ASIC’s second submission that the Earner product was a financial investment.

Derivative

It was common ground between ASIC and Block Earner that the Earner product:

1. involved the payment of consideration at a future time by customers; and
2. the future time was not less than the minimum number of days prescribed by the regulations (1 business day).

The parties disagreed as to whether the amount of consideration was determined, derived from or varied by reference to an asset, rate, index, or commodity (Third Limb i.e. the test set out in section 761D(1)(c) of the Act).

Block Earner submitted that the Third Limb was not met because the conversion from cryptocurrency to Australian dollars was not part of the same arrangement as the arrangement comprising the loan of cryptocurrency by the customer to Block Earner. It also submitted that, in effect, the Earner product comprised three distinct services: the Exchange service, the Access service, and the Earner service, and that the conversion of the cryptocurrency to Australian dollars was not an inherent feature of the Earner product but rather an optional and distinct service.

The Court found that Block Earner’s submissions were correct, as the Terms of Use provided for three separate services accessible by registered users. Even if the Exchange service would, in the ordinary course, be used at the end of a loan of cryptocurrency, the Court did not consider that it would be reasonable to assume that the parties to the arrangements regarded the loan and the Exchange service as constituting a “single scheme” for the purposes of the definition of “arrangement” in section 761B of the Act. Further, the customers were not required to use the Exchange service at the end of a loan of cryptocurrency. Rather, conversion to Australian dollars was only one of three options that customers had when exiting the Earner product – they could take cryptocurrency in kind, move the cryptocurrency into the Access service, or have it converted into Australian dollars.

On that basis – that the conversion was not an inherent and inevitable component of the Earner product – the Court rejected ASIC’s allegation that the Earner product was a derivative within the meaning of the Act.

Where to from here?

ASIC’s Consultation Paper 381: Updates To INFO 225: Digital Assets: Financial Products And Services and the accompanying Draft Revised INFO 225 were issued in December 2024 and the consultation period on the draft lapsed some months ago. ASIC will need to have regard to the Full Court’s decision in finalising its update to INFO 225, to the extent that the decision has an impact on ASIC’s draft update.

If you are a Crypto firm operating in Australia or dealing with customers in Australia, you should:

• review your terms and conditions to consider if changes could usefully be made having regard to the interpretive approach taken by the Full Court; and
• be aware that, in any event, the re-elected Australian federal Labor Government’s Statement on Developing an Innovative Australian Digital Asset Industry will most likely result in further consultations and new law in coming months. Based on this Statement, consultations and exposure draft laws that may be relevant to your existing and proposed products are expected on “the four primary elements of Australia’s approach to digital asset reforms, [being]:
  • a framework for Digital Asset Platforms (DAPs), which are online platforms that hold digital assets, such as crypto, for consumers;
  • a framework for payment stablecoins, which will be treated as a type of Stored-Value Facility (SVF) under the Government’s Payments Licensing Reforms;
  • undertaking a review of Australia’s Enhanced Regulatory Sandbox; and
  • a suite of initiatives to investigate ways to safely unlock the potential benefits of digital asset technology across financial markets and the broader Australian economy.”

If you are not already in the process of applying for an AFSL you should review the current and proposed AFSL regulatory perimeter to ready yourself for regulatory reform.

Queries

If you have any questions about this article, please get in touch with an author or any member of our Fintech, Privacy & Emerging Technologies team.

Disclaimer

This information is general in nature. It is intended to express the state of affairs as of the date of publication.  It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.

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