Canadian Securities Regulators are using Enforcement Remedies Against Cryptocurrency Platforms

Canadian securities regulators continue to use a combination of enforced regulation[1] and enforcement remedies to control the activities of crypto asset trading platforms that permit Canadian clients to trade crypto assets and crypto asset products that are considered securities, derivatives or commodities. These platforms are increasingly also offering access to interest-generating products such as staking and margin credit.

Several enforcement proceedings are moving toward contested hearings on the merits this year. Reasons issued in such proceedings – to the extent they do not settle – will provide insight into whether and to what extent the Commission hearing panels accept theories underpinning the forced regulation regime announced by Ontario Securities Commission (OSC) Staff last year.

Takeaways

  1. OSC Staff have issued investor warnings about several crypto asset trading platforms. Most such platforms have not yet been made the subject of enforcement proceedings. We expect enforcement proceedings against unregistered platforms to continue.
  2. OSC Staff is not limiting its enforcement efforts to entities with a local presence. In several enforcement proceedings, it worked with international securities regulators to exchange information to support enforcement action.
  3. At this stage, the respondent platforms’ positions and defences in the enforcement proceedings are not publicly known. Determinations from such proceedings – to the extent they do not settle – will provide guidance to industry stakeholders on matters that have, until now, been informed mostly by Staff’s views and expectations. The OSC’s reasons from prior settlements with crypto asset trading platforms[2] do not contain extensive securities law analysis on the agreed upon facts, and have treated as self-evident the OSC’s jurisdiction and that the impugned contracts were securities.

Background

On March 29, 2021, OSC Staff warned[3] crypto asset trading platforms that offer trading in derivatives or securities in Ontario that they had to contact OSC staff within three weeks or face potential regulatory actions. OSC Staff reiterated that they regarded such platforms as operating in Ontario for the purposes of securities regulation.

More than 70 platforms (including many that were based outside of Canada) initiated discussions with Canadian securities regulators with a view to becoming regulated in Canada.[4]

Six crypto asset trading platforms have received exemptive relief to offer crypto products to investors in Ontario.[5] Each has received a temporary restricted dealer license and is on a two year trajectory to obtaining investment dealer registration including IIROC membership. In some cases, platforms will be regulated as marketplaces; in others they will act only as dealers engaging with clients as principal in each trade of crypto assets.[6]

Enforcement proceedings against platforms

In addition to issuing investor alerts about certain unregistered platforms,[7] the OSC has initiated enforcement proceedings against several crypto asset trading platforms that apparently did not contact OSC Staff and elected not to pursue full regulation:

  • On May 25, 2021, against Polo Digital Assets, Ltd.,[8] which is incorporated in the Republic of Seychelles. A hearing on the merits is currently scheduled to start on May 19, 2022.
  • On June 7, 2021, against Mek Global Limited and PhoenixFin Pte. Ltd.,[9] which is incorporated in Singapore. A combined merits and sanctions and costs hearing is proceeding in writing, with final submissions due on March 22, 2022.
  • On June 21, 2021, against Bybit Fintech Limited, which is incorporated in the British Virgin Islands.[10] A hearing on the merits is currently scheduled on June 22, 2022.
  • On August 19, 2021, against Aux Cayes Fintech Co. Ltd.,[11] which is incorporated in the Republic of Seychelles. A hearing on the merits is currently scheduled to start on September 19, 2022.

The allegations in all matters are similar. In general, Staff alleges that the respondents violated Ontario securities laws by operating online unregistered crypto asset trading platforms available to Ontario residents. More specifically, Staff’s allegations closely follow the March 29 notice and are consistent with the rationale underlying the six exemptive orders that have so far been granted to get crypto trading platforms launched on the road to full regulation.

In summary, Staff’s posits that (a) the platform maintains custody of crypto assets deposited and traded on the platform in wallets it controls, (b) investors do not have possession or control of such crypto assets deposited or traded on the platform, (c) investors are dependent on their contract with the platform to satisfy withdrawal requests in order to take possession of crypto assets in their accounts, and (d) while the platform purports to facilitate trading of the crypto assets in investors’ accounts, in practice, the platform only provides its investors with contracts involving crypto assets – it is these contracts that constitute securities and derivatives. Though currently on track for a contested hearing, these proceedings could ultimately settle.

Enforcement proceedings continue against those offering crypto assets

In the foregoing four cases, only the platform operator has been named as a respondent. Staff has not commenced enforcement proceedings against any individuals involved in the impugned unregistered activities.[12] Staff has not alleged that any of the respondents were engaged in fraud or other illegality, or that any investors have been harmed.

This approach contrasts with enforcement proceedings brought by Canadian securities regulators against entities and individuals who allegedly engaged in the unregistered distribution of securities and derivatives through crypto asset / token offerings in the past year:

  • On March 31, 2021, the Financial Markets Administrative Tribunal of Quebec (FMAT) issued orders prohibiting securities transactions, freezing orders and orders to stop solicitation of public investors against Opération Phoenix Inc. and its director. The company offers plans for leasing computation units used for cryptocurrency mining. The Autorité des marchés financiers (AMF) is currently investigating the company, alleging that its activities amount to trading securities for which it did not obtain proper registration. The Tribunal held that this activity is prima facie, an investment contract subject to the Securities Act.[13]
  • On July 14, 2021, the OSC approved a settlement with Vantage Global Prime Pty Ltd. (and others), where the company was alleged to be trading contracts for differences with Ontario investors using leveraged exposure to cryptocurrencies, while not being registered with the OSC.[14]
  • On August 4, 2021, FMAT issued a series of conservatory, protective and preventive orders against the executives of Hope, an organization with no legal existence which created and promoted new cryptocurrencies without being registered with the AMF.[15]
  • On October 12, 2021, FMAT issued orders prohibiting Nuvoo Inc, G.O. Great Offers Direct Ltd, and others from trading securities. The companies offered material and infrastructure for crypto-mining. Customers could buy leases of mining power for the purpose of mining cryptocurrencies on equipment owned by the defendants. The tribunal found that this activity was subject to the Securities Act and subject to the registration and prospectus obligations.[16]
  • On December 22, 2021, the OSC found that Miner Edge Inc. contravened Ontario securities laws by perpetrating a fraud on investors, engaging in the business of trading securities without registration and illegally distributing securities. Miner Edge Inc. sold investments in a purported cryptocurrency mining company.[17]
  • On December 31, 2021, the OSC approved a settlement with Syed Saad Aziz, founder of Yonge Street Capital LLC, in relation to trading activities by this entity. The company was promoted as a hedge fund, which invested investors’ funds in various securities and cryptocurrencies. For the purposes of the settlement, the parties agreed that the respondent engaged in the business of trading securities without registration.[18]

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