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 that its yield-generating products effectively function as financial services. without license.
The investment watchdog filed a civil suit in federal court on Wednesday afternoon, alleging that Block Earner is violating financial regulations with its Crypto Earner, USD Earner and Pax Gold products.
According to the fintech, “Earner” products allow users to transfer Australian dollars into cryptocurrencies and immediately lend these digital assets to Block Earner, who then entrusts them to decentralized borrowing platforms Aave and Compound.
“Your deposits are lent to borrowers, who pay an annualized return on the borrowed funds,” the Block Earner website says.
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A portion of these returns are then paid back to clients, compounded daily, with Block Earner claiming annual fixed returns of between 4% and 7%.
But in its Federal Court filing, ASIC says the “winning product was one or more of a managed investment system, a facility through which a person makes a financial investment or derivative.”
ASIC alleges that these products count as a managed investment program because they see users contributing money and crypto-assets in exchange for rights earned by the program – in this case, a return on those initial payments.
Other information previously released by Block Earner indicated that the fintech “is able to generate returns by pooling customer funds and lending them to our trusted partners,” ASIC claimed.
“Members do not have day-to-day control over the operation of the program,” added ASIC.
Operation of these systems requires an Australian Financial Services License (AFSL), which Block Earner does not have.
The watchdog is seeking financial penalties from Block Earner for its alleged violation of financial regulations and wants the Federal Court to enforce a liquidation of “Earner” products with the remaining funds returned to users.
ASIC also wants the court to issue an injunction prohibiting Block Earner from offering these services without AFSL.
The Federal Court has not yet set a hearing date.
ASIC Lawsuit Reveals Chasm in Expectations Over Crypto Regulation
The legal challenge exposes the vastly different views that regulators and industry players may take with respect to the regulation of cryptocurrencies and their derivatives.
In its terms of service, Block Earner clearly states its views on the regulatory landscape for cryptocurrency yield-generating products.
These services “do not constitute the provision of a financial service in relation to financial products which would require triggering the requirement for us to hold an AFSL” under Australian law, Block Earner says.
In a statement provided to SmartCompanyBlock Earner founder Charlie Karaboga called ASIC’s legal intervention a “disappointing result”.
The dispute arose out 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.
“Going forward, 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 ASIC leadership” and says the company has already applied for an AFSL to cover “our upcoming products where requirements license are clear”.
Previously, Karaboga had 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 favor,” Karaboga said in an op-ed last month.
“Won’t regulation stifle our work and our innovation in this industry as a whole? I’m convinced it won’t – and in fact it will benefit everyone involved.
“The Australian government is seeking to protect ordinary consumers from the perceived dangers of relatively new technology, and Block Earner is seeking to build trust in an industry we believe is the future of finance.
“The way to achieve both of these goals is, in part, through regulation.”