Both sides of the coin: developing a multi-stage rights model to classify crypto-assets under the Corporations Act

In order to establish Australia as an economic hub for fintech, the Australian Government is reviewing the classification of crypto-assets for regulatory purposes. A “crypto-asset” is a digital representation of value which operates on a blockchain. There are many uses for crypto-assets outside of cryptocurrencies, including as coupon-like assets which offer utility within a network. These “utility tokens”, generally do not offer the token-holder any rights to financial benefits. Despite this, investors may be exposed to financial risk if they purchase utility tokens through an Initial Coin Offering (ICO) with the hopes that they will appreciate in value. Whether these assets should be subject to financial markets law is therefore uncertain. ASIC has stated in Information Sheet 225 that utility tokens will be interests in a managed investment scheme if they are sold through an ICO. If so, they will be considered financial products under Chapter 7 of the Corporations Act, and be subject to ongoing disclosure and compliance requirements that may make decentralisation impossible. This policy will undoubtedly hinder developers' ability to innovate in Australia. This article's purpose is thus to develop a framework for classifying tokens which protects investors without jeopardising Australia's ability to attract fintech innovation.