AFSL Requirements for DeFi Lending & Staking Protocols in the Australian Crypto Sector

Introduction

Decentralised finance (DeFi) lending and staking protocols operate in a complex regulatory environment under Australian law. The critical question for protocol developers, intermediaries, and service providers is whether their operations require them to apply for an Australian Financial Services Licence (AFSL). This determination hinges on whether the product or service constitutes a “financial product” under the Corporations Act 2001 (Cth), a classification that has been significantly shaped by recent court decisions and evolving regulatory guidance.

This analysis examines the application of Australian financial services licensing requirements to the DeFi sector, drawing on landmark case law such as ASIC v Block Earner and ASIC v Finder Wallet. By integrating these pivotal judgments with updated guidance from the Australian Securities and Investments Commission (ASIC) and the Treasury, this guide provides essential clarity for operators seeking to understand and navigate their compliance obligations in this dynamic legal landscape.

Classifying Yield Products & Financial Product Status

Managed Investment Schemes & The Block Earner Case

A managed investment scheme (MIS) under the Corporations Act 2001 (Cth) involves three key elements:

• People contribute money or money’s worth for an interest.
• These contributions are pooled in a common enterprise to produce financial benefits.
• Contributors lack day-to-day control over the scheme’s operation.

Recent case law has scrutinised how this definition applies to DeFi yield products, particularly distinguishing between fixed and variable returns.

Initially, in ASIC v Web3 Ventures Pty Ltd [2024] FCA 64, the Federal Court found that Block Earner’s fixed-yield “Earner” product was an unregistered MIS. The court focused on representations that customer funds were pooled to generate returns.

However, this decision was overturned on appeal by the Full Federal Court in ASIC v Web3 Ventures Pty Ltd [2025] FCAFC 58. The appeal court’s decisive finding was that the Earner product did not involve pooling contributions for the purpose of producing financial benefits for the members.

Instead, Block Earner used the loaned crypto assets to generate returns for itself, and its obligation to users was purely a contractual debt to repay the principal and a fixed interest. Users had no right to participate in the scheme’s profits or performance, making them creditors rather than members of a collective investment.

This ruling clarifies that a fixed contractual entitlement is distinct from having a right to benefits produced by the scheme itself.

Debenture Analysis & The Finder Wallet Judgment

A debenture is defined in section 9 of the Corporations Act 2001 (Cth) as a chose of action that includes an undertaking to repay, as a debt, money that has been deposited or lent. The application of this definition to crypto products hinges on whether the user is lending “money” or transferring ownership of a digital asset.

The landmark case of ASIC v Finder Wallet Pty Ltd [2024] FCA 228, which was later affirmed on appeal in ASIC v Wallet Ventures Pty Ltd [2025] FCAFC 93, provided critical clarity on this issue. The court ruled that the “Finder Earn” product was not a debenture.

The reasoning was that:

• Customers first used Australian dollars to purchase a stablecoin, TrueAUD.
• They then transferred the title of this digital asset to Finder Wallet.

This was characterised as a transfer of property, not a deposit or loan of money. Although users had a contractual right to receive their crypto asset back with a return, there was no undertaking to repay money as a debt.

This judgment suggests that DeFi products structured around the transfer of cryptocurrency, rather than the lending of fiat currency, are unlikely to be classified as debentures.

Derivatives & Variable Yield Considerations

A derivative, as defined under section 761D of the Corporations Act 2001 (Cth), is an arrangement where its value is derived from or varies by reference to something else, such as an underlying asset or rate. In the context of DeFi, a product’s classification as a derivative often depends on whether it offers a fixed return or a variable yield tied to market performance.

The Block Earner case also offered insight into this area with its “Access” product, which provided users with direct, non-discretionary access to third-party DeFi protocols like Aave and Compound.

The court found that this variable-yield product was not a derivative or a facility for making a financial investment. Instead, it was classified as a contract for the future provision of services—specifically, providing streamlined access to DeFi protocols.

A key factor was that:

• Users retained control and ownership of their digital tokens.
• Block Earner did not pool the funds or exercise discretion over how they were used.

This outcome indicates that variable-yield products that merely facilitate access to protocols, without taking control of user assets, may carry a lower regulatory risk of being classified as a financial product.

Intermediary Risk & Operating Frontend Interfaces

‘Arranging to Deal’ & Web Interface Risks

A fundamental regulatory risk for operators in the DeFi space is that providing a user interface or frontend to a protocol can fall under the legal definition of arranging to deal in financial services. Under section 766C of the Corporations Act 2001 (Cth), the term “arranging” is interpreted broadly.

This means that operating a web interface (GUI) for a protocol like Aave or Compound may constitute arranging to deal, even if you did not write the smart contract itself. The risk is triggered if your interface is:

• Directing users,
• Collecting fees,
• Or otherwise facilitating the connection between users and the smart contract.

ASIC’s Regulatory Guide 36 clarifies that facilitating transactions—including through administrative or intermediary functions—can be considered dealing in a financial product if it is integral to the transaction.

Consequently, if a platform acts as an intermediary by managing or arranging staking or lending on behalf of its clients, it is more likely to be classified as providing a financial service that requires an AFSL.

Custody Obligations & Asset Holding Standards

Intermediaries that provide custodial or depository services for digital assets classified as financial products must hold an AFSL with the appropriate authorisations. This requirement applies directly to any operator that holds customer crypto assets while also offering functionalities such as staking or trading.

Custody is a central focus of the proposed Digital Asset Platform (DAP) reforms. Under this new framework, platforms that hold client assets will be required to meet minimum standards for asset holding, including:

Requirement	Description
Hold Assets on Trust	Client assets must be held on trust for the client.
Maintain Financial Resources	Operators must maintain adequate financial resources, including meeting Net Tangible Assets (NTA) requirements.
Prohibit Unauthorised Use	Client assets cannot be used for the operator’s own purposes unless there is clear authorisation to do so.

Even noncustodial wallet providers are not entirely free from scrutiny. If their interface facilitates transactions involving financial products in a manner that implies an arranging or dealing role, they may also face regulatory examination.

Peer-to-Peer & Pooled Lending Structures

Regulatory Risks of Pooled User Funds

Lending models that involve pooling user funds—where contributions are combined and then allocated to borrowers through a protocol or an intermediary—face a high likelihood of being classified as a financial product. This structure is often considered a MIS under the Corporations Act 2001 (Cth), as it typically meets the core definitional criteria.

These criteria include:

Criterion	Description
Pooling of Contributions	User funds are combined or used in a common enterprise.
Generation of Benefits	The pooling is for the explicit purpose of producing financial benefits for the contributors.
Lack of Control	Contributors do not have day-to-day control over the individual lending decisions made with their funds.

ASIC generally considers such arrangements to be a MIS when an operator invests the pooled funds and users receive returns based on the protocol’s performance.

The risk of this classification increases if the platform offers fixed-yield returns, as this closely resembles a guaranteed return on a financial investment.

P2P Matching & Credit Licensing Issues

In contrast, a true peer-to-peer (P2P) lending model—where a platform solely matches individual lenders with individual borrowers without any pooling of funds—presents a different regulatory profile. This structure may avoid being classified as a MIS if the platform does not take custody of assets and merely acts as an intermediary.

However, avoiding an MIS classification does not eliminate all regulatory obligations. P2P matching platforms can still trigger other licensing requirements depending on their specific activities. For instance:

Scenario	Potential Licensing Requirement
Arrangements as Credit Facilities	The operator may need to obtain an Australian Credit Licence (ACL) under the National Consumer Credit Protection Act 2009 (Cth).
Tokenised or Derivative-like Lending	If lending is tokenised or its value is derived from another asset, it could be classified as a derivative, a regulated financial product.

A key risk for P2P platforms is that they often evolve to include features such as:

• Default protection
• Loan aggregation

These features can introduce pooling and push the model back into the territory of a MIS.

Technical & Financial Staking Distinctions

Technical Staking & Validator Services

Technical staking, also known as native proof-of-stake staking, is an activity where an individual interacts directly with a blockchain’s automated consensus mechanism. This process involves contributing and locking up tokens to help secure the network and validate transactions.

According to guidance from ASIC, this form of staking is generally not considered a financial product. The key characteristics of technical staking that distinguish it from a financial service include:

Characteristic	Description
User Control of Assets	The user retains full title and control over their staked digital assets, which remain in their self-custodied wallet.
Direct Reward Mechanism	Rewards are a direct result of providing a validation service to the blockchain network, not from an intermediary’s deployment of tokens.
No Central Operator	The blockchain protocol handles validation and reward distribution automatically, without a central operator managing the process for the user.

Because the reward is earned for providing a validation service and there is no ongoing involvement from a third-party operator, the arrangement is less likely to be classified as a financial product under the Corporations Act 2001 (Cth).

Financial Staking & MIS Risks

In contrast, financial staking, or “staking as a service,” occurs when a user deposits their crypto assets with a third-party operator who manages the staking process for them. This model is highly likely to be regulated as a financial product, often falling under the definition of a MIS.

This is because user funds are pooled or used in a common enterprise, and the service provider manages the activity while users, who lack day-to-day control, receive returns.

ASIC’s updated guidance from October 2025 confirms that managed staking services are likely to be considered a MIS or financial investments. Examples of financial staking that would likely require an AFSL include:

Example of Financial Staking Service	Rationale for Regulation
Staking with Sub-Minimum Amounts	Allowing users to stake with less than the protocol’s minimum requires the pooling of assets from multiple users.
Guaranteed Returns	Offering guaranteed returns, regardless of the underlying protocol’s performance, resembles a financial investment product.
Instant Withdrawal of Staked Assets	Providing instant withdrawal capabilities involves a level of intermediation and risk management beyond simple staking facilitation.

The regulatory distinction is significant: if you take custody of user assets, pool them, or promise returns, you are likely operating a financial product that requires an AFSL.

Decentralisation & The No-Action Limitations

Why Decentralisation Is Not a Regulatory Defence

A common misconception in the DeFi sector is that the absence of a central controller or the use of a decentralised structure provides immunity from regulatory obligations. However, under Australian law, this is incorrect.

ASIC has explicitly stated in its guidance that employing offshore or decentralised structures does not mean key obligations under Australian laws can be ignored.

If a digital asset is promoted or sold, or if related services are provided in Australia, then Australian laws will apply, which raises whether a foreign business or person needs to apply for an AFSL. This principle holds true even if the services originate from an offshore entity, as the regulatory focus is on:

• the substance of the activity, and
• its connection to Australian users,

not on the technology’s architecture or branding.

Liability for Central Operators & Promoters

Even if the underlying smart contracts of a protocol are decentralised, regulatory liability can still fall on any central operator, promoter, or entity that exercises control over key aspects of the user experience. This includes entities that:

• manage a protocol’s frontend interface,
• handle marketing and user acquisition, or
• otherwise direct users to the platform.

The critical regulatory question is not about the protocol’s architecture, but about who is providing services to Australian users and exercising control.

The entity operating the user interface or access point can be held liable for “arranging” or “dealing” in a financial product under the Corporations Act 2001 (Cth). Consequently, if there is an identifiable operator managing a frontend, the likelihood of triggering financial services obligations increases significantly, regardless of the protocol’s claims of decentralisation.

Proposed DAP & Tokenised Custody Reforms

Digital Asset Platform (DAP) Licensing Proposal

In September 2025, the Australian Treasury released draft legislation introducing a new regulatory framework for digital asset intermediaries, now known as the digital asset platform reforms. This proposal creates two new categories of financial products under the Corporations Act 2001 (Cth):

• DAPs
• Tokenised Custody Platforms (TCPs)

A DAP is defined as a facility where an operator holds digital tokens on behalf of clients. This definition covers a range of services, from simple custody to platforms that facilitate transactions.

Under the proposed regime, any business operating a DAP will be required to hold an AFSL with the correct authorisation. This change is designed to bring key players in the DeFi ecosystem into the established Australian financial services regime, closing existing regulatory gaps. Such players include:

• Crypto exchanges
• Staking service providers
• Digital asset custody providers

Exemptions for Low-Value Facilities & Staking

The proposed legislation includes several important exemptions to balance consumer protection with innovation. A key exemption is for small-scale operators, who may not need to obtain a full AFSL if they meet specific criteria for a “low-value facility.” These criteria include:

Table 1: Low-Value Facility Exemption Criteria

Criterion	Threshold
Per-Person Asset Holding	Hold client assets valued at less than $5,000 per person.
Annual Transaction Volume	Maintain an annual transaction volume below $10 million.

Additionally, the draft legislation introduces a targeted exemption for certain intermediated staking arrangements. An arrangement may be exempt from being classified as a separate financial product if:

Condition	Description
Use of Client Tokens	The operator uses a client’s digital tokens specifically for staking.
Pass-Through of Rewards	The rewards generated from staking are passed through to the client.
Provision of Benefits	The arrangement provides benefits, such as allowing participation with less than the protocol’s minimum staking amount.

Conclusion

Navigating AFSL requirements for DeFi protocols requires a detailed analysis of whether a product is a financial product, a determination shaped by key court decisions like Block Earner and Finder Wallet. The regulatory risks for any DeFi arrangement depend on its structure, including the distinctions between technical and financial staking, the use of pooled funds, and the role of intermediaries, with proposed DAP reforms set to further clarify the financial services regime.

With the legal landscape for the digital asset ecosystem constantly evolving, proactive assessment is crucial for ensuring compliance with Australian law. To navigate the complexities of the financial services regime for your DeFi lending or staking protocol, contact our expert AFSL lawyers at AFSL House for tailored legal advice and guidance.

Frequently Asked Questions (FAQ)