Every year, the Australian Securities and Investments Commission (ASIC) announces its Enforcement Priorities — areas of focus that will guide its efforts and help financial firms know where to make improvements. For 2023, ASIC’s Enforcement Priorities include something that may feel novel: “Misconduct involving high-risk products including crypto assets.”
Here’s what to know about crypto misconduct and how to avoid ASIC enforcement action.
Recent ASIC actions
With crypto becoming a more widely used form of currency, it was only a matter of time before ASIC stepped in to more actively protect consumers. The commission consistently warns of crypto risks. While ASIC doesn’t directly oversee many products and services, it supports a regulatory framework intended to protect consumers.
Some recent examples of ASIC enforcement include:
- Block Earner lawsuit: ASIC alleges this fintech company ‘provided unlicensed financial services in relation to its crypto-asset-based products.’
- Finder Wallet lawsuit: This ASIC lawsuit mentions failure to comply with design and distribution obligations (DDO) and other crypto-related regulatory failures.
- Binance Australia searches: In early July, ASIC reportedly conducted searches of multiple Binance Australia locations. This follows expansive regulatory action in other jurisdictions against the large crypto exchange.
- Binance Australia Derivatives licence cancellation: In response to a request from Binance, ASIC cancelled the Australian financial services licence held by Oztures Trading Party Ltd (trading as Binance Australia Derivatives).
This follows other regulatory crackdowns in the U.S. and Europe, indicating that cryptocurrency will be an ongoing topic for the global financial market.
What this means for market participants
Based on its recent actions, it’s clear that ASIC intends to look carefully at four significant crypto themes:
Are crypto asset firms undertaking unlicensed activities?
If a firm deals in crypto assets or related services which ASIC classifies as financial products/services, that firm could be considered as operating unlicensed activities.
In Australia, a firm must have an Australian Financial Services Licence (AFSL) or Australian Credit Licence (ACL) to provide certain products or services, such as lending or earning solutions. If these licences aren’t in place, ASIC may take enforcement action.
Are firms keeping client assets segregated?
Client assets in both cash and crypto forms are often not segregated from a firm’s own assets and kept onshore in Australia. The concept of client money/asset segregation is fundamental to protecting consumers and has been a core element in maintaining integrity in traditional financial services markets.
As similar cases arise in the U.S. (e.g. FTX), ASIC is likely to focus on the potential misuse of client funds and assets. This is especially true if the assets in question can be defined as financial products under the existing regulatory regime.
Are risks properly disclosed?
A firm may be guilty of misleading customers if it fails to appropriately disclose the risks of buying crypto assets or where the client’s assets are being held. The same is true if a firm misleads clients about the ability for them to withdraw funds.
Are there failures to prevent crypto market misconduct by clients?
Firms must have adequate arrangements in place to:
- Report suspicious matters to the Australian Transaction Reports and Analysis Centre (AUSTRAC).
- Identify and onboard clients.
- Detect fraud.
- Identify money laundering.
- Recognise market manipulation.
If these controls are nonexistent or faulty, the firm itself could be guilty of misconduct.
How to protect your crypto firm
ASIC has already taken civil action to prevent firms from carrying out alleged unlicensed activities; it has even cancelled an existing licence. If ASIC or the courts follow the U.S. lead and determine that certain crypto assets are considered financial products, ASIC will have significantly increased powers to investigate and potentially take action against a range of firms. These actions could include criminal and civil proceedings and result in individual bans, large financial penalties or even jail time, not to mention the ongoing costs of remediation and legal fees.
To mitigate the risk of ASIC investigation action, crypto asset exchanges, brokers and other service providers should consider:
- Current service and product offerings: Look for potential areas that could be regarded as unlicensed activities.
- AFSL/ACL applications: If you find potentially unlicensed activities, you need to take quick action to either eliminate or adjust them, or apply for the relevant licences.
- Disclosures: Analyse website disclosures, disclaimers and terms/conditions to ensure there are no misleading statements.
- Arrangements for misconduct: Be prepared to detect, escalate and remediate potential market misconduct, incidents and suspicious matters. Know what and when to report to AUSTRAC.
- Client money/assets: Know how and where your business holds client money and assets. What representations are you making to current and potential customers about these items?
- Risk and compliance frameworks: Assess whether your frameworks are appropriate for the nature, scale and complexity of your business and the potential for increased regulation coming your way
- Independent compliance expertise: Engage an expert early in the process to help review and improve arrangements before ASIC action is required.
With help from MIntegrity and RegsWeb, our Digital Regulatory Web Service, your firm can reduce regulatory risk and improve your overall compliance framework, including policies, procedures, documentation and more. We’ll help you keep up with and prepare for ASIC’s Enforcement Priorities — both now and in the future.
Want to discuss in more detail how your business can prepare for increased regulation? Schedule a confidential call here with MIntegrity co-founder, Andrew Tait.
Contact us today to learn more about MIntegrity’s independent compliance expert services and RegsWeb.
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