Australian regulators have released several key announcements this week in an effort to help provide additional clarity in relation to initial coin offerings (ICOs) and cryptocurrency compliance.
Key to these has been ASIC’s announcement that it has begun issuing inquiries to issuers and their advisers for potential breaches of financial product regulations and for potentially misleading and deceptive conduct in relation to ICOs.
While the announcement should not come as a surprise to anyone operating in this space - ASIC has been advising issuers to seek appropriate advice for some time now - it does reinforce the interest of regulators in ICOs and in keeping across emerging new activity.
ASIC’s guidance is also a further reminder of the increasingly cross-border nature of new technologies, with ASIC emphasising the fact that Australian consumer protection laws can still apply regardless of whether a token (or other crypto asset) is issued by an Australian or foreign entity.
ASIC’s interest in misleading and deceptive conduct reflects ASIC having received delegated power from the Australian Competition and Consumer Commission (ACCC) which allows ASIC to take action alongside the ACCC where ASIC considers misleading or deceptive conduct in relation to an ICO has occurred. This means that ASIC can regulate token sales and crypto assets regardless of whether the token is a ‘utility’ token, a financial product or ‘digital currency’.
The updated Information Sheet 225 now gives the following examples of what ASIC may consider to be potentially misleading or deceptive conduct:
- using social media to generate the appearance of a greater level of public interest in a token sale;
- undertaking or arranging for a group to engage in trading strategies to generate the appearance of a greater level of buying and selling activity for a token sale or a crypto asset;
- failing to disclose adequate information about the token sale;
- suggesting that the token sale is a regulated product or the regulator has approved the token sale if that is not the case; and
- failing to ensure disclosures (and professional advice) are up-to-date, particularly where the design of the token sale or the crypto asset changes over the course of product development.
The updated Information Sheet also notes general Australian laws (including directors’ duties) apply regardless of the type of token, and reminds industry that licensed Australian market operators “are expected to play an important gatekeeper role in ensuring the suitability of issuers and the products that they are permitted to list and trade on their markets”.
Revised ATO guidance on treatment of cryptocurrencies
The Australian Taxation Office (ATO) has also recently revised its online guidance on the tax treatment of cryptocurrencies. The revised guidance is consistent with the ATO’s previous position that cryptocurrencies are a CGT asset. The ATO is also looking at practical issues in the taxation of cryptocurrencies actively engaging with industry and other interested stakeholders using their “Let’s Talk” platform, and is actively monitoring the crypto space.
Issues which are currently on the radar of the ATO include:
- treatment of proceeds from ICOs, particularly the sale of utility tokens;
- gains and losses from cryptocurrency trading and businesses dealing in cryptocurrencies;
- collection of GST on the supply of goods or services in exchange for cryptocurrency; and
- payments to staff in cryptocurrency – these may be subject to fringe benefits tax rather than the PAYG withholding regime.
Startups exploring token sales should be mindful of Australian tax implications, including on the upfront receipt of proceeds from the sale, and in providing goods or services in exchange for the coins or tokens issued.
ICOs in Australian courts
The NSW Supreme Court has also handed down the first Australian judgement relating to an initial coin offering or token sale in Matter Technology Ltd v Mrakas  NSWSC 507. While the case focuses on directors’ duties, employment and intellectual property issues rather than the nature of the token itself, it provides a timely reminder that token sales and crypto assets exist within the wider Australian law.
It is important to ensure that:
- appropriate corporate authorisations, employment contract protections and other IP arrangements are in place as soon as possible, and certainly before, running a token sale;
- you maintain constant vigilance about potential conflicts of interest between your legal duties and other obligations as a director, advisor, employee or otherwise when conducting a token sale; and
- your whitepaper accurately reflects the legal arrangements with your parent company, advisors, sponsors and other third parties.
If you would like further guidance on what this means for you, please contact us – we are more than happy to help.