The Ontario Securities Commission (OSC) has initiated enforcement actions against two foreign-based crypto asset trading platforms (CTPs). The actions are the first to be announced following the OSC’s previously issued warning to CTPs with clients in Ontario that they would face potential enforcement action if they did not contact the OSC by April 19, 2021 to commence the process of bringing their operations into compliance with Ontario securities regulations.
On May 25, 2021, the OSC published a statement of allegations against Polo Digital Assets, Ltd. (Poloniex) for failing to comply with Ontario securities law. Then, on June 7, 2021, the OSC published a statement of allegations against a second group of entities operating a CTP, Mek Global Limited and PhoenixFin Pte. Ltd. (KuCoin) (collectively, the Statements of Allegations). In addition to seeking to hold Poloniex and KuCoin accountable for non-compliance with Ontario law, the Statements of Allegations note that the enforcement actions are intended “to signal that crypto asset trading platforms flouting Ontario securities laws will face regulatory action”. As both Poloniex and KuCoin are based outside of Canada, it is clear that the OSC is not limiting its enforcement efforts to entities with a local presence.
The OSC has alleged in respect of the CTPs operated by each of Poloniex and KuCoin (each a Platform) that:
- the Platform is available to Ontario residents;
- Ontario residents have opened accounts on the Platform and have used the Platform to deposit and trade in crypto asset products;
- the Platform is subject to Ontario securities law because crypto asset products offered on the Platform are securities and derivatives; and
- the Platform has nonetheless failed to comply with the registration and prospectus requirements under Ontario securities law.
The Poloniex and KuCoin enforcement actions are the first to be brought following the OSC’s March 29, 2021 press release (Release) giving CTPs until April 19, 2021 to contact OSC staff to initiate compliance discussions, failing which steps would be taken to enforce applicable requirements under securities law.
The OSC’s Release was issued in connection with the publication on March 29, 2021 of Staff Notice 21-329 - Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (Staff Notice) by the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC).
The OSC alleges that despite the warning in the Release, neither Poloniex nor KuCoin contacted the OSC. More information on the Staff Notice and Release is available in our April 2021 Blakes Bulletin: Canadian Securities Regulators Deliver Bear Hug to Crypto Asset Trading Platforms Operating in Canada.
Apart from factual details, the Statements of Allegations are nearly identical, and neither Statement of Allegations contains any indication that Poloniex or KuCoin were engaging in any specific illegal activity other than operating a CTP in Ontario without complying with the registration and prospectus requirements under Ontario securities law. The Statements of Allegations do not allege any fraud or misuse of client assets.
The Statements of Allegations emphasize the dual purpose behind the regulatory compliance process outlined in the Staff Notice, noting in each case that non-compliance by CTPs with such process “expose[s] Ontario investors to unacceptable risks and create[s] an uneven playing field within the crypto asset trading platform sector”.
The Statements of Allegations further underline the seriousness with which the OSC takes its warning in the Release that it would initiate enforcement actions against CTPs operating in Ontario that do not contact the OSC to discuss compliance. CTPs with Ontario clients that have not yet contacted the OSC should take heed and consider taking immediate steps to initiate compliance discussions with the OSC.
The OSC has indicated that its 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.” As of May 25, 2021, the OSC indicated that more than 70 platforms had initiated compliance discussions with Canadian securities regulators.
For further information, please contact:
Chris Barker 416-863-2710
Alex Moore 416-863-2754
Christopher Jones 416-863-2704
or any other member of our Capital Markets group.
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