Another step towards clarity in the regulation of digital assets: full federal court hands down a new judgment

In February and June last year, we considered the Federal Court’s first instance decisions in the matter of ASIC v Web3 Venture Pty Ltd (Block Earner).  At that time, the Block Earner case was ASIC’s, Australia’s securities regulator, first enforcement action against a crypto business.  ASIC, in the first instance decisions, succeeded and the Court found that Block Earner contravened the law by carrying on a financial services business without holding an Australian Financial Services Licence (AFSL), and by operating an unregistered managed investment scheme. 

ASIC subsequently appealed the Court’s decision on the appropriate penalty. Block Earner also filed a cross appeal against the principal finding, arguing that its Earner product was not a “financial product” for the purposes of the Act, because it was neither a managed investment scheme nor a derivative or facility by which a person made a financial investment.

Block Earner was successful on appeal in overturning the decision at first instance. 

In its judgment handed down on 22 April 2025 (Judgment), the Full Court of the Federal Court of Australia allowed the appeal of Block Earner from the Court’s first instance judgment. The Full Court agreed with Block Earner that the Earner product was not a financial product, and that Block Earner did not contravene ss 911A or 601EB of the Act. It followed that ASIC’s appeal of the penalty was also dismissed and the Full Court ordered ASIC pay Block Earner’s costs of the appeal, cross-appeal and trial.

What does this mean for those operating in the digital asset sector?  The Judgment provides clarity on the specific regulatory perimeter for managed investment schemes and derivative products using block chain technologies.  On the other hand, the arduous nature of this litigation underscores the regulatory uncertainty plaguing the sector and the criticality of businesses minimising regulatory risk at all junctures.

Reasons – Managed Investment Scheme

On appeal, Block Earner contended that the primary judge erred in finding that the Earner product was a managed investment scheme because it had the following features (see [46] of the Judgment):

1. “the contribution of money or money’s worth was in consideration for the acquisition of rights [to] benefits produced by the scheme”; and
2. “the contributions were to be pooled or used in a common enterprise to produce financial benefits for Block Earner’s customers”.

The primary judge relied on evidence of an FAQ answer on Block Earner’s website that stated the contributions made by users were to be “pooled” to find that the Earner product was a managed investment scheme.

The Full Court found that the primary judge erred in making that finding because the relationship between Block Earner and its customers was defined by the relevant loan terms, not the FAQ, and that in any event the FAQ response did not purport to represent that customers of the Earner product would be conferred the right to participate in or benefit from Block Earner’s own lending activities beyond the fixed interest payment. Customers were not exposed to the risk or rewards of how Block Earner used the funds in the scheme.

The Full Court held that the contribution of money by Block Earner’s customers was not pooled for the purpose of producing financial benefits for those who hold interest in the scheme, nor was it in consideration for the acquisition of rights to benefits produced by the scheme within the meaning of a “managed investment scheme” under s 9(a)(i) of the Act.

Reasons – Facility for Financial Investment

The Full Court also found that the Court below had erred in finding that the Earner product could be considered a financial investment under s 763B of the Act. The Full Court reasoned that the generation of a return that meant Block Earner could meet obligations to its users should not be conflated with the generation of a return or other benefit for its users.

Since Block Earner used the funds produced by investors for itself, and to benefit itself, the Full Court was unequivocal that users of the Earner product did not make a financial investment under s 763B of the Act.

Reasons – Derivative

In the alternative, ASIC contended that if the Earner product was not a managed investment scheme, it was a derivative – also requiring a license - as defined in s 761D of the Act.

ASIC’s position was that, because the Earner product dealt in cryptocurrency, customers were obliged to use Block Earner’s exchange feature to access their earnings in AUD – creating a derivative product due to the discrepancies in exchange rates.

The Full Court disagreed (at [135] of the Judgment):

“the conversion of cryptocurrency to AUD via the Exchange service was a distinct process that would take the user out of the cryptocurrency environment… even if all users of the Earner service had to use the Exchange service at the end of the loan of their cryptocurrency, the compulsion to use that service does not make it part of “a single scheme.””

Regardless, customers were not obliged to use the exchange service in this instance – with the Full Court finding that conversion to AUD was one of three options when leaving the Earner product. The Full Court rejected ASIC’s contention that customers’ use of the exchange service was an “inherent and inevitable” component of the Earner product.

The Earner product was not found to be a derivative within the meaning of s761D of the Act.

Key Takeaways

In our article on the first instance judgment, we noted the Court’s decision clarified the definition of a managed investment scheme and would assist businesses operating in the crypto and digital asset sector in deciding whether they ought to apply for an AFSL. The decision of the Full Court provides further clarification, with the additional insight that, while the FAQ content did not override the contractual terms in this case, businesses must (to minimise regulatory risk) be careful to not publish misleading material.

For businesses providing crypto and digital assets products in Australia, this decision should not be taken as the last word on the regulation of these products.  Australian regulators will continue to carefully review businesses operating in this space and take enforcement action where appropriate.  Until Australia receives the benefit of comprehensive reform of regulation of digital assets and crypto products, businesses will need to navigate the regulatory complexity and carefully consider each product in detail against the licensing regime 

Our Australian team has experts who can advise at all stages of corporate regulatory compliance. Please reach out anytime to discuss these important issues.