ASIC wins Qoin case: freshly minted jurisprudence on crypto, NCPs and the meaning of ‘on behalf of’

The Federal Court last week found in favour of ASIC against digital currency payments provider BPS Financial Pty Ltd (BPS) over its Qoin Wallet product. Justice Downes held that BPS:

• unlawfully carried on a financial services business without holding an Australian financial services licence (AFSL), contravening sections 911A and 911A(5B) of the Corporations Act 2001 (Cth) (Corporations Act); and
• in the course of that business, engaged in misleading and deceptive conduct, and made certain false and misleading representations, contravening sections 12DA(1), 12DB(1)(a) and 12DB(1)(e) of the ASIC Act.

The case is Australian Securities and Investments Commission v BPS Financial Pty Ltd [2024] FCA 457. In this article, we comment on the Court’s findings and the issues raised by BPS’ contravention of the Corporations Act.

ASIC’s victory in this case was largely based on the facts. On two crucial submissions, the Court disagreed with ASIC. First, the Court agreed with BPS on what constituted the non-cash payment (NCP) facility. Second, and possibly more importantly, the Court disagreed with ASIC’s interpretation of ‘on behalf of’, as that phrase is used in sections 9 (previously section 910A) and 916A of the Corporations Act.

This is the first time that the words ‘on behalf of’, as they are now used in sections 9 and 916A of the Corporations Act, have been the subject of judicial interpretation, even though these provisions have been in the legislation since 2001.

Until this case, guidance on the meaning of these words in these statutory provisions was limited to ASIC policy and other case law (which acknowledged that the meaning of these words depends on the context in which they are used). The Court rejected ASIC’s submissions on these words having a more restricted meaning and application, and instead, held that they should be given a broader interpretation.

This decision is significant not so much because it is ASIC’s first court win against an NCP facility involving crypto, but more so because it provides important guidance on identifying the precise financial product that is an NCP facility and provides jurisprudence on the scope of the authorised representative exemption which should be taken into account when considering ASIC's policy on this issue.

Refresher on relevant financial services laws

A person who carries on a financial services business in Australia must hold an AFSL granted by ASIC authorising them to provide the relevant financial services, unless an exemption applies.^[1] Exemptions from holding an AFSL include the following:

• Authorised Representative Exemption:^[2] Where a person provides the financial service on behalf of the holder of an AFSL as its authorised representative, by written notice.^[3]
• Intermediary Authorisation Exemption:^[4] Where a person (i.e. the product provider) issues the financial product, but pursuant to an ‘intermediary authorisation’ arrangement, the holder of an AFSL makes offers to people to arrange for the issue of the financial product by the product provider (who then issues the financial product in accordance with the offer).

In 2021, ASIC released Information Sheet 225: Crypto-assets to provide guidance on how Australian financial services laws apply to crypto-assets. Providing financial product advice or dealing, in relation to a crypto-asset, may constitute the provision of financial services if the particular crypto-asset is a financial product.

While crypto-assets are not, in and of themselves, an established category of ‘financial product’ for the purposes of the Corporations Act, depending on the particular circumstances, a crypto-asset may fit into an existing category of financial product, such as a security (including a debenture), derivative, or an interest in a managed investment scheme.

A facility through which a person makes an NCP is also a financial product.^[5] Generally, a person makes NCPs if they make payments, or cause payments to be made, otherwise than in the physical delivery of Australian or foreign currency.^[6] A ‘facility’ is defined broadly and includes intangible property, an arrangement, or a combination thereof.^[7]

What is Qoin?

Since January 2020, the Qoin Wallet App has been publicly available by BPS for download onto mobile devices. Upon completing the sign-up process for the Qoin Wallet App, users could proceed to create a Qoin Wallet. The Qoin Wallet is a separate software product that interacts with the Qoin Blockchain, a decentralised, distributed ledger that records all transactions using Qoin, the notional unit of exchange.

Through the Qoin Wallet, a person can:

• view their Qoin balance;
• ‘send’ and ‘receive’ Qoin from other wallets; ^[8] and
• purchase Qoin directly from BPS.

Identifying the financial product

There was no controversy that BPS’ Qoin business involved an NCP facility (which is a financial product), but BPS and ASIC disagreed as to what constituted the financial product.

ASIC submitted that the relevant financial product / the NCP facility was the entire Qoin Facility, which comprised of:

• the Qoin Tokens;
• the Qoin Blockchain ledger;
• a wallet facility;
• a means of acquiring Qoin Tokens; and
• a means whereby business operators who hold Qoin Wallets can register as participating merchants in the Qoin Facility.

Justice Downes disagreed, holding that the relevant financial product was the Qoin Wallet alone. Her Honour’s reasons are set out at [107] – [112]:

• Just because a financial product’s functionality requires integration with another product, facility or thing and depends upon that thing’s existence to function, does not mean that it forms part of the financial product.
• The financial product must be something capable of being ‘issued’ or ‘acquired’ such that ‘dealing’ in it may occur. A system by means of which a facility operates is not capable of being issued or acquired.
• The identification of the financial product should focus upon the point at which a person makes the financial investment, manages a financial risk, or in this case, makes the non-cash payment.
• The test that follows is: what is the direct mechanism or thing allowing the person to perform one of those functions?
• Applying that test, the relevant ‘financial product’ was the arrangement between BPS and each user allowing the user to make NCPs upon the issue of the Qoin Wallet, and not the systems such as the Qoin Blockchain which supported the Qoin Wallet.
• Her Honour also found support in the examples set out in section 763D of actions that constitute making NCPs, one of which was "making payments by means of a facility for a direct debit of a deposit account". Having regard to the statutory purpose of Chapter 7, Parliament could not have intended for aspects of a third party financial institution, which might draw on the deposit account, to be included as part of the financial product. So, the financial product in the example is only the direct debit facility.

How did BPS contravene section 911A?

BPS attempted to be covered under exemptions from holding an AFSL

From the outset, BPS knew that it was carrying on a financial services business, and it had sought to rely on both the authorised representative and the intermediary authorisation exemptions by entering into the following arrangements:

• First Billzy Arrangement: In December 2019, BPS entered into an ‘Authorised Representative Agreement’ and an ‘Intermediary Agreement’ with Billzy Pty Ltd (Billzy), an AFSL holder with NCP facility authorisations.
• PNI Arrangement: In November 2020, on the expectation that the arrangement with Billzy would soon cease, BPS entered into an ‘Authorised Representative Agreement’ with PNI Financial Services Pty Ltd (PNI), another AFSL holder with NCP facility authorisations.
• Second Billzy Arrangement: In September 2021, the arrangements reverted back with BPS and Billzy executing a new ‘Authorised Representative Agreement’ and an ‘Intermediary Agreement’.

Authorised representative exemption – ‘on behalf of’

ASIC argued that the authorised representative exemption did not apply under the First Billzy Arrangement, the PNI Arrangement or the Second Billzy Arrangement because BPS did not provide the financial services ‘as representative of’ or ‘on behalf of’ Billzy or PNI.^[9] It argued that, because BPS was the issuer of the Qoin NCP product, it was not providing financial services as agent of Billzy or PNI and that ‘as representative of’ and ‘on behalf of’ was effectively conflated with agency.

Justice Downes disagreed with ASIC. Her Honour reasoned that an AFSL holder is generally free to determine the circumstances in which it will be prepared to authorise a person to act on its behalf. Her Honour noted that section 916A(3) provided specific circumstances when an authorisation was void, and that the text of the legislation did not impose an additional rule that prevented a person from acting as an authorised representative of an AFSL holder in order for the authorised representative, itself, to issue the financial product lawfully.

The Court’s holding calls into question some of ASIC’s policy in ASIC Regulatory Guide 36. ASIC’s policy in ASIC Information Sheet 251 (INFO 251), on the other hand, may be able to be differentiated from the holding in this case, at least insofar as INFO 251 states that a trustee – which is subject to certain duties at law, including a duty to act personally and a duty not to improperly fetter its discretions – may not issue interests in a trust as an authorised representative of an AFSL holder.

Authorised representative exemption – authorisations

Notwithstanding the interpretation that permitted a broader application of an authorised representative exemption, BPS could not rely on the authorised representative exemption during the periods it was covered under the First Billzy Arrangement and the Second Billzy Arrangement. This was because the relevant authorised representative agreements did not, by their express terms, authorise BPS to either issue the Qoin NCP product or give general financial product advice about it.

Under those agreements, Billzy appointed BPS to ‘provide the Specified Financial Services’, which were defined as providing general advice on, and dealing in ‘non-cash payment facilities issued by [Billzy], limited to [Qoin or the Qoin Wallet etc.]’, where the meaning of ‘dealing’ had the meaning in section 766(1)(a) and was limited to arranging for a client to apply for, acquire or dispose of a financial product.

The problem was that:

• the relevant financial product was issued by BPS not Billzy; and
• BPS was issuing the financial product and not merely arranging for it to be issued.

Although the Court accepted that BPS and Billzy had intended that BPS be the issuer of the Qoin Wallet, the Court also held that there was no ‘clear error’ to be corrected in a readily apparent manner. At [171], Justice Downes cited Justice Gibbs who had observed that:^[10]

If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different.

In contrast, the Court found that BPS could rely on the authorised representative exemption during the period it was covered under the PNI Arrangement because ‘by the plain terms’ of the agreement with PNI, BPS was authorised to issue the Qoin NCP product and give general financial product advice about it.

Intermediary authorisation exemption

Under the First Billzy Arrangement and Second Billzy Arrangement, the intermediary agreements provided that:

• the licensee and its authorised representatives are appointed as the intermediary to arrange the issue of the Qoin Wallet; and
• the licensee and its authorised representatives are authorised to make offers to people to arrange for the issue of the Qoin Wallet.

When read together with the authorised representative agreements, the Court found that the arrangement was, in fact, one where BPS would make offers to arrange the issue of the product by BPS.

The Court held that BPS could not rely on the intermediary authorisation exemption in section 911A(2)(b) because the language and intention of that provision supported the requirement that the product provider be a separate person from the person making the offers.

ASIC Act contraventions

Additionally, the Court held that BPS engaged in misleading or deceptive conduct and made false or misleading representations concerning the Qoin Wallet, including that:

• the Qoin financial product was officially registered or officially approved, when it was not;
• Qoin could be used to purchase goods and services from an increasing number of Qoin merchants, when that was not the case; and
• someone who purchased Qoin tokens could be confident that they would be able to exchange them for other crypto-assets or fiat currency through independent exchanges, when no such exchanges existed.

Implications

This decision is important in many respects:

1. It demonstrates ASIC’s approach to enforcement, including its scrutiny of crypto businesses, as seen in ongoing or recent action against NGS Crypto, Block Earner, Finder Wallet, and Bit Trade (Kraken). ASIC has said that it is not afraid to pursue cases where the law might be considered unclear.^[11]  
2. It provides initial judicial guidance on whether, and to what extent, something may be characterised as a non-cash payment facility (and therefore a financial product), particularly in the context of a crypto-asset.
3. It provides important clarification to the scope of the authorised representative exemption. 
4. Enterprises that are carrying on a financial services business must ensure that they are actually exempt from holding an AFSL if they intend to rely on an exemption; in particular, care needs to be taken when drafting authorised representative agreements and intermediary authorisation agreements.
5. Abundant reluctance should be applied when considering whether to convey that a financial product has been registered or approved in some official manner (even without using the word ‘official’) by a regulatory body or other authority.

If you have any comments on this case or questions about what this might mean for your business, please contact Partner Austin Bell.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).