Update to Australia’s ICO Guidance: Clearing and Settlement

A few days ago, Australian Securities and Investments Commission (ASIC) updated its Information Sheet on ICOs and Crypto-assets. This is the second, and most significant update it has made to the information sheet since its initial publication in 2017.

This is also the first time that ASIC has brought in the clearing and settlement licensing regime into the ICO and crypto-asset analysis. First, miners and transaction processors can be considered to be a part of the clearing and settlement process when tokens that are financial products are involved. Second, crypto-exchanges that deal with tokens that are financial products may also be operating a clearing and settlement facility (in addition to a financial market). This is huge, and you may have seen recent arguments from Blockstack that argue otherwise, requests for clarification from Templum on these issues (from a US regulatory perspective):

“We have taken the position that Blockstack, the miners and the blockchain are not clearing agencies under the Exchange Act because the types of activities they engage in are not those described in the definition of a clearing agency. To the extent that these activities occur on the blockchain, the blockchain is not a “person” that would be required to register.” – Blockstack’s Reg A Preliminary Offering Circular May 2019

“A blockchain technology platform could be required to register as a clearing corporation if it compares the trades of users of the platform, clears the trades, and prepares instructions for automated settlement of the trades. The platform could also be required to register as a clearing corporation if the platform acts as the common counterparty and guarantees the completion of trades. We encourage the SEC to clearly define when a blockchain technology platform must register as a clearing corporation and to define how blockchain technology may be used by such firms.” – Templum’s Request for Rulemaking Regarding Clearance and Settlement

” … miners on many blockchain protocols could be deemed to be preparing and sending transaction confirmations when they process transaction related information that is added to a blockchain. There may also be cases where miners could be deemed to be participating in the execution of securities transactions or handling customer funds (i.e. , digital assets that are not securities) or digital assets that are securities. These types of activities may fall within the scope of what is considered to be “effecting transactions” by the SEC.” – Templum’s Request for Rulemaking Regarding Digital Asset Mining.

These discussions emphasize the difficulty of pin pointing which person, entity or blockchain is operating the clearing and settlement facility / clearing agency in a world of open source code, smart contracts and distributed participants. This is complicated by the fact that the requirement to hold a clearing and settlement facility licence is worded in a way that assumes a person is operating the facility. Under this reading, if there is no one operating the crypto exchange (e.g. in the case of truly decentralized exchanges or DEX that could one day be run and entirely controlled by code and smart contracts), it is unclear how s820A can be breached:

And while this is a pretty significant update, it is not surprising considering the broad definition of a clearing and settlement facility:

ASIC previously hinted its application of clearing and settlement regime to the crypto exchanges in its 2018-22 Corporate Plan released late October last year. In the report, ASIC stated that one of its plans was to develop an approach for applying the Principles for Financial Market Infrastructure (which applies to CCPs, CSDs, SSS amongst other FMIs) to crypto exchanges (more on this here).

Fortunately, there is room for policy considerations when deciding whether an exemption from the requirement to hold a clearing and settlement facility license should be granted (see Regulatory Guide 211: Clearing and Settlement Facilities)

It will be interesting to see how concepts such as “the trade is the settlement” and “The beauty of the blockchain is that you don’t need a clearing house” will be considered in such discussions.

In other related news, the International Organization of Securities Commission (IOSCO) recently recognized that whilst crypto exchanges perform functions that are similar to trading venues, they may also perform functions that are more typically performed by intermediaries, custodians, transfer agents and clearing houses. However, the Consultation Report ultimately concluded that it is not appropriate to prescribe new standards or requirements having recognized the evolving nature of crypto-asset markets globally.