OSC’s crypto crackdown tough to enforce but still worth it, securities experts say

OSC’s crypto crackdown tough to enforce but still worth it, securities experts say
As the Ontario Securities Commission cracks down on unlicensed exchanges where investors can buy and sell the hottest new cryptocurrencies, experts say there’s little chance of collecting any fines, or enforcing legal judgments.

After all, many of those companies are based thousands of kilometres away; in the past month, Ontario’s securities regulator has issued cease and desist notices to two crypto-exchange companies in the Seychelles (14,991 kilometres away) and one based in Singapore.

With the regulator signalling that it’s prepared to go after even more of the exchanges, there are perfectly sound strategic reasons for the crackdown, even if enforcing any judgments is a long shot at best, says Jean-Paul Bureaud, executive director of Fair Canada, an investors rights group.

“This really isn’t about collecting fines. There are other ways to make investors safe,” said Bureaud.

Bureaud suggested that the OSC has three main goals in mind as it cracks down: Making potential customers hesitate, sending a message to Canadian-based exchanges which aren’t playing by the rules, and being enough of a nuisance to offshore cyber-exchanges that they give up on trying to sell to Canadians.

“Raising awareness of the risks, and bringing some of the legitimate ones into the regulatory system are both helpful when it comes to protecting investors,” said Bureaud.

On May 25, the OSC charged Seychelles-based Poloniex with breaking securities regulations by trading securities without registration, not complying with prospectus disclosure requirements, and engaging in activity “contrary to the public interest.” Last week, the OSC charged Singapore-based PhoenixFin Pte Ltd. and Seychelles-based Mek Global Ltd. with similar offences, saying that the two companies run the KuCoin cryptoexchange.

The moves came after the OSC issued a March warning to cryptocurrency exchanges that they needed to follow securities regulations if they wanted to keep selling to Ontario investors. In a press release announcing the Poloniex charges, the OSC said 70 of the exchanges have since initiated “compliance” discussions with the OSC and other Canadian regulators. Just one exchange — controlled by online brokerage Wealthsimple — has come up with a full compliance plan blessed by the OSC.

The crackdown is more about sending a message to potential customers than it is about enforcing any judgments, said securities lawyer Matthew Burgoyne.

“If someone in Canada is looking at putting money into crypto currencies, maybe they’ll think twice about doing it through one of these exchanges. That’s something that the OSC is probably hoping will happen as part of this,” said Burgoyne, a partner at Calgary-based McLeod Law, who runs the firm’s cryptocurrency practice.

If the OSC is persistent enough, Burgoyne argued, some firms may simply decide not to accept any investments from Canadian customers, choosing to “geoblock” access to their apps or websites.

Andreas Park, a finance professor at the University of Toronto’s Rotman School of Business, agreed that there’s a method to the OSC’s crackdown madness.

“It sends a message to Canadian investors that it’s not a good idea to put your money into these exchanges. And it sends a message to these companies: ‘If you’re accepting money from Canadians, we’re going to be a pain in the ass to you unless you comply with our regulations,’” said Park.



In early May, OSC chair Grant Vingoe, in a speech to the Canadian Club, said the sheer scale and pace of cryptocurrency investment was cause for concern.

“In January of this year, global crypto asset market capitalization reached $1 trillion (U.S.) for the first time. Then, in April — just 94 days later — it reached $2 trillion. By way of comparison, that’s larger than the assets under management of all Canadian mutual fund and ETF holdings,” Vingoe said in his speech.
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