Judge finds crypto firm breached law but acted honestly and didn’t deserve a fine

A crypto start-up won’t have to pay penalties for breaching the law, after a Federal Court judge said the company had actually acted honestly.

Crypto start-up Block Earner has escaped paying a fine for breaching the law, thanks to a court ruling that it acted honestly after considering and getting advice that it did not need a financial services licence to operate.

Federal Court judge Ian Jackman also accepted that a media statement published by the Australian Securities and Investments Commission in February was “unfair and misleading” about an earlier decision, and he considered it weighed in Block Earner’s favour for “relief from liability”.

ASIC alleged Web3 Ventures, operating as Block Earner, offered fixed returns on crypto-linked assets, although it did not have a licence and was therefore in breach of the law.

It claimed the “Earner” and “Access” products were both financial products under corporations law, because they effectively operated as management investment schemes.

But Justice Jackman on Tuesday ruled that Web3 Ventures would not have to pay any pecuniary penalties, after finding in February the Earner product breached the law for about eight months in 2022 and the Access product did not.

“In the present case, I am satisfied that Block Earner acted honestly,” Justice Jackman said.

“The unchallenged evidence of (co-founder Charlie) Karaboga is that at the time the Earner product was launched, he considered whether an AFSL was required to provide that product, and formed the view that it was not a regulated financial product and that an AFSL was not required.”

In February, the Federal Court found the Earner product met the definition of a managed investment scheme and a facility for making a financial investment under the law, and therefore required a licence. However, it was discontinued voluntarily by December 7, 2022 – and a few weeks later Block Earner had returned to users all of the cryptocurrency that had previously been lent as part of the Earner product.

After an initial ruling was handed down in February, ASIC published a media release which Justice Jackman said incorrectly led readers to believe Block Earner’s product needs a financial services licence.

“In my view, Block Earner is correct to submit that ASIC’s media release was unfair and misleading,” he said.

“The crypto product offered by Block Earner which needed an (Australian Financial Services Licence) was the Earner product which had not been offered since November 2022. The product which is still provided by Block Earner, namely the Access product, does not require (a licence).”

Justice Jackman said Mr Karaboga met with Block Earner’s head of risk and compliance, and received advice from law firm Gilbert and Tobin before launching the products.

“Block Earner submits that it sought at all times to comply with the law, did not engage in conscious impropriety, and did not seek to obtain an improper financial gain by launching or maintaining the Earner product without an AFSL or as an unregistered managed investment scheme,” Justice Jackman said.

“ASIC accepts that Block Earner acted without any deceit or conscious impropriety, and without any intent to gain an improper benefit or advantage.”

Block Earner submitted that the “contraventions arose in an uncertain regulatory environment”.

In a statement, ASIC said it was reviewing the decision.

“The court found Block Earner’s contraventions to be serious. However, the court relieved Block Earner from liability to pay a penalty on the basis, among other things, that it acted honestly and not carelessly when it offered the Earner product,” the statement read.