When cryptocurrency exchange FTX group collapsed last month in the Bahamas, its local subsidiaries FTX Australia Pty Ltd and FTX Express Pty Ltd also collapsed.
The Australian companies went into receivership on November 11 and within days the Australian Securities and Investments Commission (ASIC) suspended the Australian financial services license that FTX Australia had since March 2022.
The fact that FTX Australia had an Australian financial services license came as a surprise to some people, who had mistakenly assumed that anything to do with crypto was beyond the scope of Australian regulators.
It also raised questions – including for Assistant Treasurer Stephen Jones — on how FTX Australia managed to acquire its Australian financial services license and how ASIC seemed to have missed the opportunity to intervene earlier.
And it draws more attention to the 20-year-old licensing system and what an Australian financial service actually means to the businesses that own them.
Licensed to do what exactly?
When FTX launched in Australia this year, the press release read: “FTX launches fully registered and licensed Australian operations”.
But what exactly was it authorized to do?
Australia’s Financial Services Licensing Regime (AFS), in place since the late 1990s, authorizes each company to do specific things, in relation to specific financial products, for specific customers.
Every company’s license is different, and what ASIC requires differs depending on what the company is allowed to do.
FTX Australia’s license authorized it to deal in, create a market for and provide general advice in relation to derivatives and foreign exchange contracts to retail and wholesale clients. That is it.
Please note that crypto-assets are not specified nor is there any crypto-asset exchange being conducted.
The jury is still worldwide on whether crypto-assets (as opposed to investments derived from crypto-assets) are financial products at all.
It is possible to think of them as gold bullion or fine art – or pet rocks – where the asset itself is not a financial product, but can be made into a financial product.
If a cryptocurrency is not a financial product, licensing laws may not apply, which could explain why one of the two Australian-founded companies – FTX Express, which operated the crypto exchange – did not have an AFS license.
The lesson is that knowing that a company has an AFS license only gets you so far, and often not very far at all.
Unless you the specific permissionsis there no way of knowing how little the company you are dealing with is licensed to do.
And ASIC regulations don’t hold back prudential regulationaimed at the stability of the company itself, including to ensure that it can meet its financial obligations under reasonable conditions.
Prudential regulation is the job of the Australian Prudential Regulation Authority, which has not regulated either FTX Australia or FTX Express.
Licenses for sale
FTX Australia’s ASIC license was originally granted to someone else in full in 2008. After a series of acquisitions, it passed through a number of hands until it ended up with FTX in March this year.
While an original applicant must pass strict checks, this has not always been the case for subsequent purchasers.
ASIC has known for years that its ASF licenses ended up in new hands when buying and selling companies. In 2017, it requested the government’s ASIC Enforcement Review Taskforce to recommend changes to the law that would allow it to revisit an AFS license when owners changed.
The change that was finally committed in 2020 only required licensees report ASIC when a license changes hands, within 30 days.
ASIC was not required to approve the change of control.
Limited ASIC privileges
ASIC may make further inquiries to determine whether there is reason to believe that a new licensee is likely to be in breach of its legal obligations or is “fit and proper” – but it is under no obligation to do so.
If it finds that the licensee is likely to be in breach of its obligations or that it is unsound, it may suspend or cancel the license after giving the new owners a fair hearing.
But such examinations have not become routine. Most of the (hundreds) of licensee purchases reported each year seem to pass through to the holder, as does FTX’s.
Even if ASIC had reviewed FTX’s purchase of the license in March 2022, it might not have found a reason to revoke it given the very limited number of activities it allowed.
The collapse of FTX may cause ASIC to change its attitude towards change-of-control transactions involving AFS licensees, for which it may need more resources.
But even when that happens, customers would do well to make sure they understand exactly what “AFS licensed” really means.