cryptoassets regulation

Until recently, crypto trading was essentially the Wild West as far as investors were concerned. While it’s still far from tame, Canadian regulators are coming to grips with the fledgling sector.

This time last year, there was essentially no regulated crypto activity in Canada. Over the past 12 months, the Ontario Securities Commission (OSC) has approved several ETFs that invest in crypto and two trading platforms have been brought into the regulatory tent (Wealthsimple Digital Assets Inc. and Coinberry Ltd.), with numerous others in discussions to follow them.

At the same time, the OSC has four active enforcement cases against offshore crypto firms that it alleges violated securities rules by trading without registration after the regulator explicitly warned the firms to seek registration.

In late September, regulators took another step toward bringing the crypto sector to heel.

A joint notice from the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) set out guidance on the marketing activities that may put crypto platforms offside with regulators. The notice highlights possible violations, such as making false or misleading claims, using promotional tactics that encourage risky or excessive trading, and failing to supervise the use of social media to communicate with clients and the general public.

The guidance warns firms against boasting about being the “cheapest” or the “best” source for Bitcoin or professing to be the sector’s “leading exchange” without evidence to support those claims. The warning against baseless online declarations could be a jolt to a sector where hype and bluster is plentiful.

The crypto sector is known for fake claims about trading volume. One 2019 study from Bitwise Asset Management Inc., a San Francisco-based crypto fund and index provider, claimed that 95% of crypto volume wasn’t genuine.

Last year the OSC settled an enforcement case against Toronto-based crypto firm Coinsquare Ltd. and a couple of its executives who admitted to faking approximately 90% of its volume through wash trading designed to boost its ranking on third-party websites.

The sector also has had its share of scandals, including the collapse of QuadrigaCX, a prominent Canadian trading platform that the OSC found was effectively a Ponzi scheme.

Now, as crypto firms face up to the fact that they are likely going to have to register and be regulated, the warnings about their marketing practices are more meaningful.

The CSA/IIROC notice warned that adherence to marketing rules may come up in registered firms’ compliance reviews or in the application process for firms seeking registration.

The OSC is in registration discussions with 15 platforms, according to OSC public affairs manager Kristen Rose: eight have submitted applications and seven are in “active discussions” with the regulator.

The number of firms seeking registration may continue to grow. After the OSC issued its warning to the sector in March — giving crypto trading firms until April 19 to get in touch about registration or face possible enforcement action — the regulator reported that more than 70 platforms approached it.

Firms trying to secure registration may be most concerned about toeing the marketing line. But the CSA/IIROC notice also warned that platforms (including unregistered foreign platforms used by Canadian clients) could be hit with enforcement action for breaching these rules.

There are already four foreign crypto firms facing enforcement cases from the OSC. The regulator alleges that while the platforms purport to provide investors with trading in cryptoassets, the investors don’t actually hold or control any cryptoassets. Instead, the regulator alleges the platforms are providing inves­tors with trading in instruments (or contracts) that are tied to cryptoassets, which amounts to trading in securities (or derivatives). Without registration, the OSC maintains that’s a violation of securities law.

None of those enforcement cases has been proven at a hearing. Three firms face preliminary hearings later this month and the other in January, at which point the sector will have a better idea about whether the regulator can make its allegations stick — and what sort of penalties will be imposed if the cases are successful.

While Canadian regulators seem to be making progress on both the policy and enforcement fronts, judging how much of a difference these efforts are making is difficult. The four offshore firms facing enforcement action and 15 platforms seeking registration make up a small portion of the hundreds of crypto platforms doing business online.

Delaware-based crypto-sector data firm CoinMarketCap OpCo LLC (CMC) ranks more than 300 crypto-trading platforms based on their web traffic, liquidity and trading volume (as well as its confidence that the reported volume is legitimate, given the sector’s history). The four platforms facing OSC enforcement action all rank in the top 20.

“[It’s] really hard to know the full impact the CSA’s efforts are having, particularly on cryptos outside Canada. But this problem of measuring impact is not unique to cryptos,” said Jean-Paul Bureaud, executive director of the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada).

“I’d argue the approach seems to be having some impact, given that a number have come forward to register and are currently working with CSA members to meet regulatory requirements,” he said. “While there are challenges and limits to what the CSA can do, the alternative of doing nothing is simply unacceptable.”