Clifford Chance

The Federal Court rules that Finder Wallet Pty Ltd's "Finder Earn" product is not a debenture for the purposes of the Corporations Act 2001 (Cth).

The Australian and Securities Investments Commission (ASIC) commenced civil penalty proceedings against Finder Wallet, alleging that it provided unlicensed financial services, breached product disclosure requirements and failed to comply with design and distribution obligations in relation to its crypto-asset product, "Finder Earn".¹ See Australian Securities and Investments Commission v Finder Wallet Pty Ltd [2024] FCA 228 (J) at [1], [4], [38].

The decision is the first to explore the meaning of a "debenture" with respect to crypto-related assets.

The key issue

The key question before Markovic J was whether the Finder Earn product was a debenture for the purposes of the Corporations Act.

The test for a debenture

The test for a debenture under s 9 of the Corporations Act involves determining: if there is a chose in action; whether the chose in action includes an undertaking by the body to repay as a debt money deposited with or lent to the body. The chose in action may include (but need not) a security interest over the body's property to secure repayment: see J [16], [56]-[58].

Accordingly, her Honour considered three issues:

1. Is there a chose in action? As to this question, her Honour was satisfied that there was but noted that not every chose in action includes an undertaking of the type contemplated in s 9 of the Corporations Act.
2. Was there money deposited with or loaned to Finder Wallet?
3. Was there an undertaking by Finder Wallet to repay moneys "deposited or lent" as a debt.

The parties' submissions

ASIC's submissions
ASIC argued that the Finder Earn product should be classified as a debenture under s 9 of the Corporations Act.

ASIC contended that the product involves customers depositing or lending money to Finder Wallet, which is then notionally converted into TrueAUD and allocated to Finder Earn, creating a debtor-creditor relationship.

ASIC further contended that this process results in a chose in action, which includes an undertaking by Finder Wallet to repay the money as a debt. ASIC emphasised that the focus should be on the substance of the transaction, which is the right to repayment, rather than the form it takes. ASIC asserted that their interpretation aligns with the legislative intention to regulate corporate fundraising and protect investors, and that allowing entities to avoid financial services provisions by structuring debts involving stablecoins would be contrary to this intention: see J [40]-[45], [39].

Finder Wallet's submissions
Finder Wallet submitted that the Court's focus should be on the Finder Earn product as distinct from the transfer of AUD into a Finder Wallet account.

Finder Wallet maintained that the Finder Earn product involves two distinct transactions: (i) the purchase of an interest in TrueAUD; and (ii) the allocation of that interest to Finder Wallet in exchange for a contractual right to a return. This does not amount to a deposit or loan of money to Finder Wallet, nor an undertaking to repay a loan as a debt.

Finder Wallet contended that the product is a form of investment distinct from traditional debenture fundraising activities and that the product was an opportunity for Finder Wallet to market its services and the Finder App: see J at [7], [47]-[53], [8].

The Court's finding

Justice Markovic found that ASIC did not establish that the Finder Earn product is a debenture within the meaning of section 9 of the Corporations Act.

Her Honour held that it was the terms of the Finder Earn product which governed the relationship between Finder Wallet and the customer and not the marketing or explanatory material located on the Finder App or the Finder Website: see J [69]-[70].

The Finder Earn product involved the purchase and allocation of TrueAUD to Finder Wallet, not the deposit or loan of money. Her Honour found the customer's right was to a contractual return, not a repayment of a debt.

While Finder Wallet used the terminology of "loans" and "lending" in describing the Finder Earn product, e.g. in its FAQs and on its website, her Honour found that the contractual obligation to repay the TrueAUD allocated to Finder Wallet by a customer and the return on the investment is different from "that which is contemplated by the usual fundraising activities traditionally associated with the issue of debentures": see ABN Amro Bank NV v Bathurst Regional Council (2014) 224 FCR 1 at [676].

As a result, the alleged contraventions of the Corporations Act predicated on the Finder Earn product being a debenture could not be made out, and the proceeding was dismissed with costs: see J [104].

Key takeaways

While unsuccessful, ASIC's proceeding shows how crypto-related products and services may be regulated under financial services law in the future.

The decision sheds light on how the courts' focus is on examining the nature of the contractual obligation created by the product, rather than the apparent character or economic effect of the transaction.

Finally, the decision encourages digital currency exchange providers to consider the mechanisms which are involved in the products which they issue to customers.

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^{1 ASIC sought declarations pursuant to ss 1101B, 1317E or 1324 of the Corporations Act or s 21 of the Federal Court of Australia Act 1976 (Cth)}