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Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms. While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.
Introduction
Attitude of the country towards ICOs/token sales
The Australian blockchain industry is driving ahead with development and innovation despite regulatory headwind and uncertainty. However, reports in Australia have indicated that only 44% of Australian blockchain start-ups have survived 120 days or more after funding via an ICO. Despite crypto having been around for over a decade, in one sense or another, the market is still highly volatile as new technologies emerge and fight for market attention and adoption. Accordingly, the success of ICOs and TGEs are certainly not impervious to market sentiment. Investors, innovators, and businesses must weigh up the current state of the global crypto market (and perhaps also other traditional financial product markets) in deciding whether to pursue an ICO at one point in time or another.
Legal affairs
Presence of any explicit regulation on ICOs and the issuance of token/coins
As an ICO involves an offer of ‘financial products’ to the market (and therefore to retail clients), a product disclosure statement or a prospectus and a financial services guide that complies with the CA and other Australian regulatory instruments is usually required. Additionally, if an entity carries on a financial services business in Australia, and/or facilitates payments using crypto assets, it is also required to hold an AFSL (unless exempt).
Even in the event that an ICO is not regulated under the CA, it may still be captured by other laws such as the Australian Consumer Law set out at Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL). The ACL prohibits conduct that crosses the threshold of being ‘misleading’ or ‘deceptive’ in various types of communications. As such, ICO or TGE materials published by businesses must comply with Australian laws.
Further, the Australian Competition and Consumer Commission (ACCC) has delegated powers to ASIC to act against business communications that contain misleading or deceptive statements relating to ICOs. The delegation from the ACCC enables ASIC to pursue against misleading or deceptive conduct in marketing or selling of ICOs, even if the ICO does not involve a financial product under the CA. ASIC Commissioner, John Price, said, ‘If you are acting with someone else’s money, or selling something to someone, you have obligations. Regardless of the structure of the ICO, there is one law that will always apply: you cannot make misleading or deceptive statements about the product. This is going to be a key focus for us as this sector develops.
AML/CTF reporting requirements will also apply regardless of if a crypto asset constitutes a financial product or not.
Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins
As noted above, AFSLs, CA disclosure requirements, ACL misleading