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The crackdown on unregulated crypto trading in Canada has begun, with the Ontario Securities Commission (OSC) bringing allegations against a Seychelles-based firm for failing to heed the regulator’s warning to get registered.

On May 25, the OSC issued a statement of allegations against Polo Digital Assets, Ltd. (Poloniex), alleging that the firm is violating securities law in Ontario by operating an unregistered crypto trading platform that’s allowing Canadian investors to trade cryptoassets considered by regulators to be securities and/or derivatives.

The allegations have not been proven.

The OSC’s charges follow a warning issued by the Canadian Securities Administrators at the end of March that called on crypto trading platforms doing business in Canada to get registered with the Investment Industry Regulatory Organization of Canada. That warning gave firms until April 19 to contact regulators and start discussions on becoming compliant.

According to the OSC, more than 70 firms did heed that warning and have signalled their intention to get registered. Now, the regulator has begun dealing with the holdouts.

“Despite this warning, Poloniex did not contact the commission by April 19, 2021 or at any time to start compliance discussions,” the regulator said in its allegations.

A hearing into the charges against Poloniex has been scheduled for June 18. The OSC has indicated that it will bring enforcement action against other firms, too.

“Staff will continue to take action against non-compliant crypto asset trading platforms and are in contact with international securities regulators to exchange information to support enforcement action,” the OSC said, noting that the Seychelles Financial Services Authority provided assistance in the case against Poloniex.

Tuesday’s enforcement action appears to mark the start of a new phase in how Canadian regulators are dealing with the emerging crypto sector. To date, the only regulated crypto dealer in Canada is Wealthsimple. Now, the OSC seems determined to bring the rest of the firms operating in this space into the regulated sphere.

“Firms that have nothing to hide should embrace this opportunity to enhance confidence in their business by seeking registration and appropriate oversight,” said Grant Vingoe, chair and CEO of the OSC, in a speech to the Canadian Club of Toronto on May 19.

In his remarks, Vingoe acknowledged that it has been a challenge for regulators to come to grips with crypto firms and how they may fit within the traditional regulatory landscape.

“We are mindful of the need to balance our mandates and not stifle innovation, ensuring investor choice and investor protection,” he said.

At the same time, Vingoe stressed that regulators have investor protection concerns with the sector, particularly in the wake of the QuadrigaCX debacle — which an OSC investigation found was essentially a conventional Ponzi scheme in crypto clothing.

“Most dealers and platforms act as their own custodians, running the risk that client assets will not be legally segregated,” Vingoe said. “Without regulatory oversight, investors need to consider what is preventing the misuse of their assets and what protections they have if the platform becomes insolvent.”

To that end, Vingoe said that the OSC has determined that imposing registration requirements will ensure that investors enjoy the “critical protections they deserve.”

In the allegations against Poloniex, the OSC made its case that crypto trading firms are engaging in securities and derivatives trading.

“While Poloniex purports to facilitate trading of the crypto assets in its investors’ accounts, in practice, Poloniex only provides its investors with instruments or contracts involving crypto assets. These instruments or contracts constitute securities and derivatives,” the OSC said in its allegations.

“A process is in place for crypto asset trading platforms to bring their operations into compliance with Ontario securities law. Entities such as Poloniex, which flout this compliance process, expose Ontario investors to unacceptable risks and create an uneven playing field within the crypto asset trading platform sector.”

Of course, the chore of introducing oversight to a large crop of previously unregulated businesses isn’t an easy one, and Vingoe acknowledged that the regulators “have a lot of work ahead” in processing applications from crypto trading platforms. He added that the OSC is “committed to working with them to get this done.”

Of the 70 or so firms that have contacted regulators, the OSC’s preliminary analysis indicates that the “platforms that have contacted OSC staff appear to represent those that have the largest footprint in Ontario.”

The OSC also noted that almost one quarter of them are based outside of Canada.

“Staff are working with and obtaining more information from the firms that have initiated compliance discussions with the OSC, in order to assess the appropriate path to registration,” the OSC said. “Firms have been provided with information outlining next steps, including when to file key documents, as well as a staff contact.”

“Enforcement will also likely be very busy in the coming weeks” with firms that aren’t heading down the path to registration, Vingoe said.