In a legal challenge that could redefine how cryptocurrency platforms operate in Australia, the Australian Securities and Investments Commission (ASIC) has sued Block Earner, claiming its yield-earning products effectively operate as unlicensed financial services.
The investments watchdog filed civil penalty proceedings with the Federal Court on Wednesday afternoon, alleging Block Earner is contravening financial regulation with its Crypto Earner, USD Earner, and Pax Gold products.
According to the fintech, the “Earner” products allow users to transfer Australian dollars into cryptocurrencies and immediately lend those digital assets to Block Earner, which then farms them out to decentralised borrowing platforms Aave and Compound.
“Your deposits are lent to borrowers, who pay an annualised yield on the funds borrowed,” the Block Earner website states.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
A portion of those yields is then passed back to customers, compounding daily, with Block Earner claiming annual fixed yields of between 4% and 7%.
But in its Federal Court filing, ASIC claims the “Earner Product was one or more of a managed investment scheme, a facility through which a person makes a financial investment or a derivative”.
ASIC alleges those products count as a managed investment scheme as they see users contribute money and crypto-assets in return for rights gained by the scheme — in this case, a yield on those initial payments.
Other information previously published by Block Earner stated the fintech “is able to generate returns by pooling customer funds and lending it to our trusted partners”, ASIC claimed.
“The members do not have day-to-day control over the operation of the scheme,” ASIC added.
The operation of such schemes requires an Australian Financial Services License (AFSL), which Block Earner does not possess.
The watchdog is seeking financial penalties for Block Earner for its alleged contravention of financial regulation and wants the Federal Court to enforce a wind-up of the “Earner” products with remaining funds returned to users.
ASIC also wants the court to pose an injunction barring Block Earner from offering those services without an AFSL.
The Federal Court is yet to hand down a hearing date.
ASIC lawsuit exposes gulf in expectations over crypto regulation
The legal challenge exposes the vastly different opinions regulators and industry participants can take towards the regulation of cryptocurrencies and their derivative products.
Such services “do not constitute the provision of a financial service in connection with financial products that would require trigger the requirement for us to hold an AFSL” under Australian law, Block Earner states.
In a statement provided to SmartCompany, Block Earner founder Charlie Karaboga called ASIC’s legal intervention a “disappointing outcome”.
The dispute was borne of what Karaboga described as a “lack of clarity” over how cryptocurrency products are regulated on Australian shores.
“In an ideal world, we would build these products in a regulatory sandbox with more clarity around licensing regimes,” he said.
“In the future, we look forward to working with ASIC and other regulators in this space to make Australia an innovative space for the crypto industry.”
Block Earner intends to continue offering blockchain-based products in the future “under new guidance from ASIC” and states the company has already applied for an AFSL to cover “our upcoming products where the licensing requirements are clear”.
Previously, Karaboga has expressed enthusiasm for the federal government’s ‘token mapping’ program to investigate how crypto-assets and related services should be regulated.
“As the CEO and co-founder of a blockchain-based fintech, you might wonder why I’m in favour,” Karaboga said in an op-ed last month.
“Won’t regulation stifle our work and innovation in this industry as a whole? I’m confident it won’t — and in fact, it’ll benefit everyone involved.
“The Australian government is seeking to protect everyday consumers from the perceived dangers of a relatively new technology, and Block Earner is looking to build confidence in an industry that we believe is the future of finance.
“The way to achieve both of these goals is, in part, through regulation.”