How FTX Successfully Pretended To Be ‘ASIC-licensed’
After the fall of the FTX crypto exchange in November, its subsidiaries, FTX Express Pty Ltd and FTX Australia Pty Ltd, collapsed. Following the incident, ASIC (Australian Securities and Investments Commission) suspended the license of FTX Australia.
FTX Australia held the license from March 2022. However, FTX Australia having an Australian financial service license surprised certain individuals.
They were surprised as to how FTX Australia obtained such a license. This also raised more questions about why the agency did not intervene sooner.
When the FTX subsidiary started operating in Australia, reports alleged that it was fully registered and licensed. However, many didn’t know much about its AFS license.
The AFS (Australian financial service) licensing authority grants firms permission to conduct certain activities related to specified financial products. Meanwhile, the license granted to one firm differs from that of another.
The license usually depends on what the firm is offering and the authorization of ASIC. According to reports, the license given to FTX Australia allowed it to offer general financial advice and deal in foreign exchange contracts and derivatives for wholesale and retail clients.
Looking at the above statement, FTX Australia was not licensed to offer crypto-assets services or run a crypto exchange. Interestingly, there is still a debate about whether crypto-assets count as financial products.
Limitation Of ASIC’s Power
One limitation of ASIC’s power is that it cannot conduct prudential regulation. This is the job of the Australian Prudential Regulation Authority. Unfortunately, this authority did not regulate FTX Express or FTX Australia.
Prudential regulation ensures that a firm is stable and can maintain its financial commitments. Meanwhile, FTX Australia’s license was first given to another entity in 2008. After various takeovers, FTX Australia finally got the license in March.
Although the initial owner might have gone through rigorous checks, the case might have been different for FTX. ASIC was aware that companies, when sold, sell their AFS licenses to the highest bidder.
In 2017, the agency asked the country’s ASIC Enforcement Review Taskforce to review its powers. The aim was to ensure ASIC could revisit such licenses when the owners change.
Unfortunately, the new review only mandated firms to report such changes to ASIC within 30 days after it changed hands. Hence, ASIC still has no power to review such licenses.
The Australian Regulator Failed To Take Action
Although ASIC’s power is limited, the regulatory watchdog still has the power to undertake certain actions. For example, the agency can ascertain if a newly licensed firm will break its laws.
However, the regulator is not mandated to carry out such actions. If ASIC decides to conduct such checks and finds out the firm does not deserve the license, the regulator can cancel or suspend the permit after a fair hearing.
ASIC would have to make such inquiries a routine if it must step up to protect investors. Most licensee requests go through the watchdog, including FTX Australia’s license request.
Even if ASIC reviewed FTX Australia’s license in March, revoking it would not have been easy. This is because the agency authorized it to provide limited financial services.
Meanwhile, the FTX saga might cause the Australian regulator to change its stance towards change-of-control transactions which involves AFS licenses. However, the regulator would require more authority to do so.
Nevertheless, it would also be wise to advise clients on what “AFS licensed” means.
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