Cryptocurrency exchange Byte Power Group Limited has paid a penalty of AU$33,000, after the Australian Securities and Investments Commission (ASIC) issued an infringement notice for an alleged failure to comply with its continuous disclosure obligations.
The Australian Securities Exchange (ASX)-listed company told shareholders in October 2017 that its Singapore-based partner for the development of a cryptocurrency exchange, Soar Labs Pte Ltd, was "well advanced in the software development and expects to be alpha testing the system robustness before the end of the year".
ASIC alleges that by the following December, Soar Labs had not carried out any work for the development of Byte Power's cryptocurrency exchange, and the company had approached alternative cryptocurrency exchange software providers.
The corporate watchdog also alleges that by failing to inform the ASX that the software development for its proposed cryptocurrency exchange was not advanced and testing of the system software was not going to be undertaken by the end of the year, Byte Power was in breach of its continuous disclosure obligations.
The ASX-listed company was consequently hit with an infringement notice.
In a statement issued to the ASX following payment of the AU$33,000 penalty, Byte Power said complying with the infringement notice was not an admission of liability.
ASIC was acting on a referral from the ASX, which has currently suspended Byte Power from trading.
On December 21, 2018, the ASX issued a query letter to Byte Power, seeking responses to a number of questions to confirm the company was in compliance with the ASX Listing Rules.
The company then launched its cryptocurrency exchange on January 13, starting initially with bitcoin and litecoin. Announcing the launch a few days later, Byte Power said it had been requested by ASIC to provide the legal advice it received regarding its "loyalty tokens".
"[Byte Power Group] is working with its legal advisors to assist with ASIC's requests and remains of the firm view that these tokens are not interests in a managed investment scheme," the company wrote at the time.
In a letter dated February 4, 2019, Byte Power wrote to the exchange, asking when it could resume trading and what it needed to do in order to be allowed to trade again.
Byte Power said the ASX still has concerns about the company's disclosure around the development of its cryptocurrency exchange, the operation of its cryptocurrency exchange, and the legal status of the BPX loyalty tokens.
The ASX said it intends to continue the suspension of Byte Power's securities until it is satisfied by the outcome of ASIC and ASX's ongoing investigations.
ASIC also made a determination that places certain restrictions on Byte Power's ability to raise capital without full disclosure using a full-form prospectus. This will be in place until December 12, 2019, the watchdog confirmed.
ASIC in September got serious about its financial scam ban, announcing that it had stopped several initial coin offerings (ICOs), or token-generation events that targeted retail investors.
The watchdog said it also acted to prevent ICOs from raising capital without the appropriate investor protections in five other matters since April 2018 and stopped the issue of a Product Disclosure Statement (PDS) for a crypto-asset managed investment scheme.
The ICOs in question had been put on hold and some will be restructured to comply with the applicable legal requirements, ASIC said, noting it is also taking further action in respect of one completed ICO.
An ICO is a form of crowdfunding that can be a source of capital for startups. In return for investor cash, the organisations involved offer virtual coins such as bitcoin, ethereum, or custom tokens, and the transaction is recorded on a blockchain.
In response to questions on notice from Senate Estimates last year, ASIC said typically, ICOs are speculative, high-risk investments.
ASIC was asked to provide a detailed explanation as to whether or not ICOs are a financial product or service.
"For ICOs, the mere fact that the token issued is described as a utility token does not mean it is not a financial product. The mere existence of a statement that the ICO or the token is not a financial product also does not mean it is not a financial product," ASIC said in response. "It is important for entities to consider all of the rights and features associated with the token. Similarly, the mere fact that a crypto-asset is described as a digital currency does not mean it is not a financial product."
Where ICOs are specifically concerned, ASIC is currently issuing investor warnings and alerting investors on the risks of investing in ICOs; focusing its surveillance efforts to disrupt ICOs that are targeting retail investors and are considered misleading or deceptive; and working with other related parties about the regulatory perimeter applicable to ICOs, including with domestic and counter-part international regulatory agencies.
The Australian Treasury is currently conducting a review into ICOs, seeking submissions in response to its Issues Paper [PDF] until the end of this month.
"Regulators in many jurisdictions have expressed significant concerns over the potential risks posed by ICOs to consumers and investors. Reports of fraud and investor loss are numerous and there is also anecdotal evidence that many ICOs have been conducted based on an often incorrect assumption that existing financial regulations do not apply," the paper explains.
Specifically, Treasury is seeking views on the opportunities and risks posed by ICOs for Australia; whether the country's regulatory framework is well placed to allow those opportunities to be had, while appropriately managing the associated risks; and whether there are other actions that could be taken to best position Australia to capitalise on new opportunities.
The corporate regulator said it stopped five initial coin offerings going ahead, taking further action on an already completed ICO.
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Highly unlikely that the exchange and its users will ever get access to these funds ever again.
The NEM exchange will be outsourced to Blockchain Global and will sit alongside the company's own cryptocurrency exchange in Melbourne.