The Ontario Securities Commission fired a warning shot on Tuesday at the bow of unlicensed exchanges selling cryptocurrency to Canadians, accusing one of the largest of violating Ontario securities regulations.
Poloniex, a Seychelles-based crypto exchange formerly owned by Goldman Sachs-backed startup Circle, has violated securities regulations by trading securities without registration, failing to comply with prospectus disclosure requirements and engaging in activities “against the public interest,” according to OSC investigators.
In its statement of allegations, the OSC said Poloniex was indicted after ignoring the April 19 deadline to start discussions on how to comply with the rules. The crypto exchange did not return messages from the Star asking for comment.
“Entities like Poloniex, which flout this compliance process, expose Ontario investors to unacceptable risks and create a level playing field,” said the allegations release, which calls for up to $ 1 million in fines and prohibitions on trading for Poloniex.
Poloniex is just one of thousands of online crypto exchanges where investors can buy and sell cryptocurrencies such as bitcoin and dogecoin. It is not known how long Poloniex has been letting Canadian customers use its platform.
The crackdown is a move that investor advocates, lawyers and financial experts say was urgent as more Canadians – including many unsophisticated investors – are putting their money at risk by tapping into the craze. unstable for investments.
“It’s a potential disaster for investors who, frankly, may not be sophisticated enough to understand the risks. It also won’t be the last time regulators do something like this, ”said Matt Burgoyne, a partner at Calgary-based McLeod Law, who heads the company’s cryptocurrency practice.
The head of investor rights group Fair Canada said the OSC had no choice but to act.
“They had to take that step now. Because there are a lot of investors who really don’t take the necessary steps to really understand who they are dealing with and what they are investing in, ”said Jean-Paul Bureaud, Managing Director of Fair.
Andreas Park, professor of finance at the Rotman School of Business at the University of Toronto, said cryptocurrencies are already a volatile investment, highlighting the fluctuations seen by the world’s best-known cryptocurrency bitcoin. Earlier this year, this digital currency grew by over US $ 63,000, but now sits at just over $ 37,000. Add in transactions and term loans, and it’s a potentially expensive mix, Park said.
“It’s a very volatile underlying asset anyway. And some of these exchanges allow for margin trading on crypto futures. You can end up losing $ 100 for every dollar you invest, ”Park said.
In addition to the more general risks, Park pointed out that most cryptocurrency exchanges do not allow investors to hold their cryptocurrency. That, Park says, can be problematic if the exchange goes bankrupt, gets hacked, or worse.
“In most of these exchanges, you don’t have custody of your own assets. There are security concerns with many exchanges. Then there are people who just steal your money, ”Park said.
Tuesday’s decision comes two months after the OSC warned cryptocurrency exchanges that they must follow securities regulations if they are to continue selling to Ontario investors. In its Tuesday press release, the OSC said that 70 of the exchanges have since entered into “compliance” discussions with the OSC and other Canadian regulators. One exchange – controlled by online brokerage firm Wealthsimple – has developed a comprehensive OSC-approved compliance plan.
The OSC has scheduled an initial hearing into the allegations for June 18, but a full “merits hearing” – the regulatory equivalent of a trial – may not last for months. After a full hearing, a panel of OSC commissioners would rule on the allegations and potentially impose penalties. Poloniex may also enter into a settlement agreement with the OSC.
Earlier this month, OSC President Grant Vingoe, in a speech at the Canadian Club, said the scale and pace of cryptocurrency investments was concerning.
“In January of this year, the global market capitalization of crypto assets reached $ 1 trillion (US) for the first time. Then, in April – just 94 days later – it hit $ 2 trillion. By comparison, this is more important than the assets under management of all Canadian mutual funds and ETFs, ”Vingoe said in his speech.
“Without regulatory oversight, investors need to think about what prevents the misuse of their assets and what protections they have if the platform becomes insolvent. For the OSC, we have determined that registration is the necessary avenue to provide investors with the essential protections they deserve, ”added Vingoe.
While some in the industry may get irritated at the prospect of regulation, Burgoyne thinks it could end up being good for business.
“Listen, regulation could become a competitive advantage for the industry in Canada if it makes cryptocurrency investments safer,” he said.