What is a 'financial product' and why do digital currencies fall outside this definition?
In the Corporations Act 2001, section 763A defines financial products as facilities through which a person:
- makes a financial investment;
- manages financial risk; or
- makes non-cash payments.
ASIC considered each of the above and found that virtual currencies do not fall within this current definition of 'financial products'. This is for the following reasons:
- digital currencies, similar to real property or bullion, are not a facility through which a person makes a financial investment;
- digital currencies do not have the features of a facility which manages financial risk, such as the ability to manage the financial consequences of a particular circumstance or the fluctuation of costs, and therefore do not fall within this element; and
- digital currencies do not provide the holder any rights to make payments using the currency or to redeem it for cash, and therefore the ability of a person to use the currency is dependent on whether the other party agrees to accept payment in that form. It is on this basis that ASIC views it unlikely that a digital currency is a facility through which a non-cash payment is made.
ASIC also concluded that digital currencies are not a currency or money for the purposes of the Corporations Act, being more akin to a commodity. ASIC's finding is consistent with the view of the Australian Taxation Office (ATO) discussed below.
Furthermore, ASIC ruled that digital currencies are also not financial products under the ASIC Act. This means that general consumer protection provided by the Competition and Consumer Act 2010 applies to digital currencies, rather than the equivalent provided by the ASIC Act.
We also note that ASIC has suggested that facilities which are related to digital currencies may be financial products. For example, contracts for the purchase and sale of digital currency that do not settle immediately may be a derivative – a type of financial product.
Facilities associated with digital currencies
ASIC considered a wide range of digital currency businesses – for some of these facilities, the use of digital currencies may be financial products, while others are not. We have included a few below (refer to ASIC's submission for a fuller discussion):
- Digital currency ATMs: ASIC found that ATMs are not a financial product and the buying and selling of digital currencies through an ATM does not involve the provision of a financial service.
- Escrow facilities supporting trading platforms: not a financial product according to ASIC.
- Deferred settlement of a contract for purchase and sale of digital currency: contracts for sale/purchase of digital currency that are settled immediately are not financial products. However, those which include a delay between agreeing the price and the delivery of the digital currency would be a derivative – a type of financial product.
- Digital currency offerings by regulated financial services providers: entities that are licenced to provide financial services in Australia that have expanded their product offerings to include digital currencies will be under the usual obligations in the Corporations Act and ASIC Act in regards to these products which are considered financial products. For example, PayPal has announced that it will allow some sellers to receive payments in the form of bitcoins – this would be a non-cash payment facility arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
