Non-cash payment facilities & crypto – a technical overview

Digital assets are revolutionising traditional finance. One of the challenges is fitting them into traditional financial services regulatory frameworks, across multiple global jurisdictions. It is reckless to make assumptions on whether financial products, with the civil / criminal penalties associated with unlicensed activity, are the same across jurisdictions.

One nuance of the Australian regulatory framework is ‘non-cash payment’ facilities (NCPs), which are deemed a financial product requiring an Australian Financial Services licence under the Corporations Act 2001 (Cth) (Corporations Act). The elements of managed investment scheme products, securities and derivatives are fairly settled, and assisted by recent case law in this area. Non-cash payments, by virtue of their complication and the intrinsic use features of digital assets, remain a focus area. This article seeks to unpack the basics for industry participants. 

Non-cash payments

Section 763D of the Corporations Act provides that an NCP facility is an arrangement through which a person makes or causes payments to be made, other than by the physical delivery of Australian, or foreign currency, in the form of notes and/or coins. If the crypto-asset allows the holder to use the asset to make a payment, there needs to be a consideration as to whether it is an NCP facility in the token assessment. 

Whether a crypto token is an NCP facility depends on the rights and obligations associated with it. If the asset provides the holder with the right and supported ability to make payments, it could be an NCP facility. Additionally, NCP facilities may involve crypto-assets in scenarios where payments are made using a crypto-asset, but fiat currency is sent to recipients. 

The Corporations Act excludes certain NCP facilities from being classified as financial products, including facilities allowing payments to only one person, payments made via a letter of credit, cheque, or guarantee from a financial institution, incidental NCP facilities, credit facilities, facilities where payments are debited to a credit facility (like credit cards), money orders issued by Australia Post, and certain electronic funds transfers.

Qoin case 

In the recent case ASIC v BPS Financial Pty Ltd (Qoin)¹, the Court considered what constituted the NCP facility. Justice Downes’s findings have provided initial judicial guidance on whether, and to what extent, something may be characterised as an NCP facility (and therefore financial product), particularly in the context of a crypto-asset. 

Just because a financial product’s functionality requires integration with another product, facility or thing and depends upon that thing’s existence to function does not mean that it forms part of the financial product. In other words, the token under consideration needs to connect to the blockchain network to send and receive transactions. However, the blockchain network is not considered part of the token itself, even though the token cannot function without it. Her Honour stated:

‘While the ability to make non-cash payments using a Qoin Wallet depends upon the existence of the Qoin Blockchain, it does not follow that the Qoin Blockchain is itself a financial product, or that it forms part of the financial product’²

The financial product e.g. potential token must be something capable of being ‘issued’ or ‘acquired’ such that ‘dealing’ in it may occur. Her Honour found that:

‘Second, the system by means of which a facility operates is not itself a financial product capable of being ‘issued’ or ‘acquired’ such that ‘dealing’ in it may occur as contemplated by ss 766A(1)(b) and 766C of the Corporations Act. For this reason, the identification of the financial product should focus upon the point at which a person performs one of the functions identified in s 763A(1) of the Corporations Act (i.e. make a financial investment, manage a financial risk, or make non-cash payments) with the question then being asked: what is the direct mechanism or thing which is allowing the person to perform this function?’³

Application to NCPs

Just because something can be used to make a payment, be it a token or gold or seashells, does not mean it is an NCP. NCPs are a vexed financial product, insofar as they need to be considered on a product and functional basis.

The test is ‘What is the direct mechanism or thing allowing the person to perform the function (e.g. NCP)?’ In the Qoin case, it was ‘…the arrangement between BPS and each user which allows the user to make non-cash payments upon the issue of the Qoin Wallet.’⁴  

Accordingly, when assessing whether a token is or is not a financial product, the analysis needs to extend beyond the token itself to the surrounding infrastructure. This includes whether the issuer or broker / dealer variously maintains infrastructure, including wallet infrastructure as in the Qoin case, which allows consumers to make non-cash payments. Whether or not they can be adjudged by the surrounding facts, including whether the entity: 

• maintains online platforms, mobile apps, or other digital infrastructure;
• maintains a payment gateway to authorise / settle transactions;
• agrees to make any merchant accounts, point of sale systems, or digital wallet integration to users;
• agrees to implement SSL encryption, PCI-DSS compliance, or user authentication;
• agrees to adopt custodial or registry standards to delineate users tokens vis-à-vis the equivalent AUD (or AUD denominated assets) in the reserve i.e. for stables;
• agrees to adopt anti-fraud or recovery measures to protect the tokens;
• markets the token as a payment feature; 
• agrees to provide APIs, support channels, transaction reports, or other information to token holders.

None of these factors are conclusive in and of themselves – all broker / dealer digital currency exchanges maintain websites and/or apps to permit trading in tokens which could be used for payments, though are not designed for that sole or predominant purpose. We do not think that those platforms are trading in NCPs, unless there is something else. That is, where they have created infrastructure surrounding one or more tokens designed for it to be used for payments activity. 

Conclusion 

Australia is awaiting its payments and crypto licensing draft exposure legislation, to be delivered shortly. That framework will go a long way to clarifying this area. Until then, however, it is important to have a robust token assessment framework. For NCPs, those token assessments will extend beyond the token itself, to the surrounding infrastructure. 

¹ASIC v BPS Financial Pty Ltd [2024] FCA 457

²Ibid [108]

³Ibid [109]

⁴Ibid [110]