ASIC Crypto Clamp Down Highlights confusion in market

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By Daniel Livingston, Partner and Scott Colvin, Lawyer

ASIC has issued a final stop order on a product disclosure statement issued by Investors Exchange Limited for units in the New Dawn Fund.

The Fund, which had been marketed as the world’s first retail cryptocurrency fund, was offered to investors as a vehicle to invest in a range of cryptocurrency and blockchain assets, and was seeking to raise between $20 million and $100 million.

An ASIC stop order is generally issued where a disclosure document contains material that is misleading or deceptive, or omits information that is required under law. ASIC has previously referred to misleading or deceptive statements about crypto products as a “key focus for us as this sector develops”.

While ASIC did not provide detailed particulars surrounding the New Dawn Fund stop order, the Commission did refer generally to having concerns about the Fund’s product disclosure statement.

The action against Investors Exchange Limited caps a period of increased activity and regulatory oversight in the cryptocurrency space by ASIC.

The Commission has taken action to stop five initial coin offerings since April, with some operators opting to restructure to comply with ASIC’s disclosure requirements, or abandoning the offering entirely.

With so many stop orders being issued in that time, it is clear that confusion is rife in Australia.

That said, with the many coin offerings that we have seen in the market, there is clear reason why ASIC (and other regulators around the world) have rightly issued ‘banning’ orders. It seems as though a lot of the promoters of these ICOs are confused or otherwise do not properly understand the regulatory framework in which they are operating.

However, it is arguable that a great deal of the confusion around cryptocurrencies in Australia and other jurisdictions arises from a legislature and regulatory inability to provide strong guidance on the treatment of the new assets. As is often the case with emerging technologies and asset classes, sometimes the legislation and regulation struggles to keep pace with the innovation. This is not a criticism, but is the reality of the fast-paced and ever-evolving world we live in.

When the speed of evolution and innovation occurs in such a manner, regulators are ‘hamstrung’ in their efforts to make existing regulatory frameworks work with these new technologies when often they simply do not fit.  The approach by regulators around the world has been to try and fit square pegs in round holes. So far, this has resulted in a flight of crypto funds to jurisdictions where entrepreneurs perceive the regulatory regimes to be more accommodating and in line “with the times”.

Great opportunity is lost for those jurisdictions who continue to place their head in the sand, refusing to respond to the emerging technology.

Other jurisdictions (for instance Singapore, Switzerland, Hong Kong and Malta) are leading the way in developing new legislation and regulatory frameworks for the treatment of cryptocurrencies and digital assets. This provides greater clarity around the treatment of these unique assets in different circumstances and acknowledges the idiosyncrasies of this new asset class. Importantly, it also provides useful guidance for promoters and participants.

Those jurisdictions not adapting to the emerging cryptocurrency markets are at risk of being left behind, missing the boom of both interest and investment in this space. Dealing in digital assets will become a more typical means of trading securities, raising funds and otherwise doing business around the world. Those who think that cryptocurrency is only a “flash in the pan” are badly mistaken.

For Australia, we would love to see a focused effort by the Government to engage with cryptocurrencies on their own terms, rather than through imperfect analogies to other assets. Such an approach could see Australia leap ahead of many of its international rivals as a destination of choice for business dealing with crypto-assets, not simply to cash in on current interest, but to capture a slice of what will become one of the most dominant technology advancements of the next half century.

For further information, please do not hesitate to contact us.

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