The Australian Securities and Investments Commission (ASIC) is asking for feedback on updated guidance related to digital assets. The United States has the dreaded Howey test for trying to decide whether a digital asset is an investment covered by the securities laws. Australia has something similar.
Regulators are sometimes loathe to provide detailed examples, because people try to thread the needle to skirt the law based on the specific example provided. For the sake of clarity, ASIC has provided 13 examples.
One way people try to sidestep laws is by taking a narrow view of tokens. ASIC says that “a ‘token’ is not separated from its associated bundle of rights, benefits, expectations and features for the purpose of being traded on a digital asset or crypto platform. Generally, we understand that when you trade a ‘token’ you are transferring the rights associated with that token.”
Digital asset examples
Proof of stake blockchains need holders of their native token to stake their assets to help secure the network. ASIC does not consider staking itself as an investment product.
However, if a third party operates a node which provides staking as a service and takes a cut of returns on staking, then the bundled arrangement may be a financial product.
In the United States, artists have sued the SEC demanding clear guidance about how securities laws apply to art. That’s because the SEC settled a case with NFT project Stoner Cats and more recently threatened to sue NFT marketplace OpenSea. The artists note that conventional art markets are not considered as securities exchanges.
ASIC is comfortable providing that guidance. Meme coins not affiliated with a particular blockchain or digital asset exchange are not likely to be financial products. For NFTs sold or earned as in game assets, they are also not likely to be financial products, providing the games company doesn’t portray them as investments. (In all cases, read the original document for the accurate description).
Other examples include yield bearing stablecoins and gold tokens where the gold is held in a trust. Both will probably be classified as financial products.
On the other hand, NFTs that grant access to member-only events are not a financial product. Another example is someone who mows lawns and sells a fixed supply of tokens, each representing one square meter of grass mowing. The tokens will probably not be considered a financial product. That’s even if the proceeds of the token sale are to fund the business. The rationale is that it is unlikely to be an investment scheme because the proceeds aren’t used to generate a return for the token holder.
Do wallet developers need to register as non cash payment providers?
Most of the examples were quite straightforward. Apart from tokens being classified as investment or financial products, ASIC also covered the provision of non cash payment facilities, which need to register with the regulator. However, here the example seemed a little less clear cut.
ASIC talked about a self custodial wallet where the wallet creator also issued its own stablecoin that could be used for payments. These payments are not just between its own wallet users but between wallets. It argued the wallet operator was providing a non cash payment service. “It is a facility through which clients can and do make payments to third parties, using Company M’s token or other tokens, and Company M’s marketing promotes the wallet as having that functionality,” ASIC wrote
What was unclear was if the wallet didn’t issue a stablecoin, would they still be a non cash service provider?
That’s why the paper is just a proposal and ASIC is requesting feedback. In fact, this document is the fifth iteration of ASIC digital asset guidance that it first issued in 2017. It’s also working on policy guidance for digital asset platforms and digital asset facilities.