Open your wallets: Federal Court finds crypto wallet is a financial product – what does this mean for wallet issuers in Australia?

In Australian Securities and Investments Commission (ASIC) v BPS Financial Pty Ltd (BPS) [2024] FCA 457, ASIC alleged that BPS carried on a financial services business without holding an Australian financial services licence (AFSL). ASIC also alleged that BPS made false or misleading representations in relation to the supply or use of a financial product.

The proceedings concern the development and release of a system for making non-cash payments using a crypto asset named Qoin.

The Court separated ASIC’s claim into two parts:

1. BPS contravened the Corporations Act 2001 (Cth) (Corporations Act) by carrying on a financial services business and providing financial product advice without an AFSL (the Unlicensed Conduct Case); and
2. BPS contravened the Australian Securities and Investments Commission Act 2001 (Cth) by making certain statements on its website and in the White Paper published on that website (the Misleading Conduct Case).

A person makes ‘non-cash payments’ if they make payments (or cause payments to be made), otherwise than by the physical deliver of Australian or foreign currency in the form of notes and/or coins.

The Qoin system was comprised of a number of elements, which included:

• Qoin Wallet App: A mobile application which hosted the other elements of the system (described below) and which onboarded customers through a sign-up process. This process involved providing customers with terms and conditions, as well as the Financial Services Guide and Product Disclosure Statement.
• Qoin Wallet: An integrated component of the Qoin Wallet App, but a distinct software product. The Qoin Wallet had “the function of both viewing the balance of Qoin for a wallet address recorded on the blockchain, and the payment facility” to send and receive Qoin.
• Qoin Blockchain: The distributed ledger that stores a record of all transactions using Qoin. The Qoin Blockchain was maintained by seven “Nodes” (computers which maintain the ledger), several controlled by entities related to BPS, and was used by Qoin Wallets to initiate and record transactions.
• Qoin: The notional unit of exchange in transactions undertaken through the Qoin Wallet and recorded on the Qoin Blockchain.
• Q Shop: The online directory in which businesses and other users can list their services or products for sale.

BPS acknowledged that it was the issuer of a NCPF, BPS’ position being that the NCPF was the Qoin Wallet. However, ASIC submitted that the entire Qoin system constituted “a single scheme”, arguing that the entire arrangement under which a non-cash payment may be made is the “facility”.

The Court ultimately disagreed with ASIC on the basis that:

1. a financial product’s integration with another product, facility or thing (in this case, the Qoin Wallet App, Qoin Blockchain, Qoin or Q Shop), does not mean that those things form part of the financial product; and
2. the system which enables a facility is not itself a financial product capable of being “issued” or “acquired” and identification of the financial product should focus upon the point whereby a person makes a financial investment, manages a financial risk or makes non-cash payments.

Accordingly, the Court held that the NCPF is the arrangement between BPS and each user which allows the user to make non-cash payments upon the issue of the Qoin Wallet. The Court agreed with BPS that the Qoin Wallet was the NCPF.

BPS position was that it was not in breach of the licensing requirements of the Corporations Act. BPS took this position on the basis that:

• it was exempt from requiring an AFSL to issue the Qoin Wallet, the NCPF on the basis that:
  • it was a representative of the holder of an AFSL under section 911A(2)(a) of the Corporations Act; and / or
  • it issued the Qoin Wallet in the implementation of an intermediary agreement as described in section 911A(2)(b) of the Corporations Act; and
• it was exempt from the requirement to hold an AFSL to provide financial product advice in connection with the Qoin Wallet on the basis that it was a representative of the holder of an AFSL under section 911A(2)(a) of the Corporations Act.

BPS relied on a series of authorised representative and intermediary agreements with AFSL holder Billzy Pty Ltd (Billzy) and separate authorised representative agreement with PNI Financial Services Pty Ltd (PNI). The Court held that, in issuing and providing financial product advice in respect of the Qoin Wallet, BPS:

• was not exempt under the Billzy authorised representative agreements as the construction of the agreements were not sufficiently broad enough to cover BPS making offers to arrange for the issue of financial products;
• was not exempt under the intermediary agreement with Billzy; and
• was exempt under the authorised representative agreement with PNI.

Ultimately, ASIC succeeded on its Unlicensed Conduct Case, other than in relation to the 10-month period during which BPS was an authorised representative of PNI.

As the judgement in respect of PNI demonstrates, had the relevant agreements with Billzy been appropriately drafted, BPS would have been exempt from the requirement to hold an AFSL and the Unlicensed Conduct Case would not have been successful. However, the Billzy documentation did not demonstrate that BPS held the required appointments in connection with the Qoin Wallet issued by BPS.

While the Court supported ASIC’s position that BPS was not appropriately licensed, at least for certain periods of time, the Court took an interpretation to the arrangements that was different to that submitted by ASIC. The Court’s finding that an authorised representative may be able to use that appointment to issue a financial product is likely to generate significant interest in the financial services sector more generally where this question has otherwise been the subject to conjecture.

In any event, the judgement highlights the importance of clear and consistent drafting in connection with authorised representative and intermediary appointments.

In relation to the Misleading Conduct Case, BPS denied that its conduct in publishing the impugned statements (described below) gave rise to false and misleading conduct.

The allegations arose in relation to statements published on the Qoin website, including statements contained in the White Paper, a document published on the website that described the Qoin system and products.

The Court held that BPS made false and misleading representations in relation to Qoin and the Qoin Wallet including:

• that purchasers of Qoin would be able to exchange Qoin for fiat currency or other crypto assets through independent exchanges;
• that Qoin could be used to purchase goods from an increasing number of merchants; and
• the Qoin financial product had been approved or officially registered.

Any remaining questions in the proceedings, including the relief sought by ASIC, will be heard in a further hearing later in 2024.

BPS is also involved in class action proceedings (Its Eco Pty Ltd v BPS Financial Ltd) led by consumers and merchants who allege that they were also misled.