The Ontario Securities Commission (OSC) refused to register a crypto firm as an exempt market dealer (EMD), ruling that crypto firms should be registering as investment dealers and that allowing a firm to register in another category, with added conditions, would burden the regulator and could set a dangerous precedent.
The OSC published a decision by Matthew Onyeaju, senior vice-president registration, to deny registration to Satstreet Inc., a crypto trading platform that applied to be registered as an EMD.
According to the decision, staff of the OSC’s registration division initially recommended that the firm be denied registration, and the firm asked for a hearing to plead its case.
In that hearing, the burden of proof was on OSC staff to establish that Satstreet’s registration as an EMD would be objectionable. It argued its case on various grounds, including that the firm failed to adhere to a pre-registration undertaking that regulators required from crypto firms, and that it is seeking registration in the wrong category, among other concerns.
On the issue of whether the firm complied with the pre-registration undertaking that regulators required unregistered crypto firms to sign onto, the director concluded that the firm failed to meet certain provisions of that pledge.
“I accept staff’s position that Satstreet failed to achieve compliance with three important provisions of the [undertaking] and that Satstreet lacks the requisite high standards of business conduct required of an EMD registrant going forward,” it said.
“These failures are compounded by Satstreet’s attitude and indifference for OSC processes and unwillingness to accept oversight unless favourable to their own timing and terms,” it added.
On the question of the appropriate registration category, the decision noted that OSC staff maintain that the firm should be applying to register as an investment dealer and seeking membership in the Canadian Investment Regulatory Organization (CIRO), not looking to register as an EMD, under direct oversight of the commission.
“Staff maintain that investment dealer registration, with oversight by CIRO, is the only appropriate registration category, being both necessary and proportionate to the risks posed by Satstreet’s business model,” it said.
The firm argued that its business doesn’t require investment dealer registration, and that it only distributes securities under the accredited investor exemption, so EMD registration is appropriate.
Again, the director ultimately sided with OSC staff, ruling that apart from one aspect of its business, it’s “materially” similar to other crypto firms that are registered as investment dealers.
“I accept staff’s position that compliance with other laws does not serve as a substitute for the protections of the most appropriate regulatory regime for a particular business model,” it said.
The regulator also considered whether the firm should be allowed to register as an EMD, subject to added terms and conditions, rather than requiring it to join CIRO.
However, the director rejected that idea too, saying that granting an exception and allowing it to register as an EMD with special conditions is “unreasonable and unnecessary.”
“If bespoke, individual regulatory regimes were created for every applicant, it would not only be unfair to the overall marketplace, but it would result in significant demands on OSC resources for continuous oversight,” it said.
“OSC resources will be overburdened by the sort of regulatory arbitrage that Satstreet’s registration would create when there is a more appropriate and rigorous regulatory framework already in place for [crypto firms],” it said — adding that this could also “set the stage for a dangerous precedent where other registrants or prospective registrants make claims of (self-defined) uniqueness to enable a bespoke regulatory regime for themselves.”