The Ontario Securities Commission fired a warning shot Tuesday across the bow of unlicensed exchanges selling cryptocurrency to Canadians, charging one of the largest with breaching Ontario securities regulations.
Poloniex, a Seychelles-based crypto exchange once owned by Goldman Sachs-backed start-up Circle, broke securities regulations by trading securities without registration, not complying with prospectus disclosure requirements, and engaging in activity “contrary to the public interest,” according to OSC investigators.
In its statement of allegations, the OSC said Poloniex was charged after ignoring an April 19 deadline to start discussions about how to comply with the rules. The crypto exchange didn’t return the Star’s messages seeking comment.
“Entities such as Poloniex, which flout this compliance process, expose Ontario investors to unacceptable risks and create an uneven playing field,” said the statement of allegations, which called for up to $1 million in fines and trading bans 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’s unclear how long Poloniex has been letting Canadian customers use its platform.
The crackdown is a move that investor advocates, lawyers, and finance experts say was urgently needed as more Canadians — including many unsophisticated investors — are putting their money at risk by tapping into the volatile investment craze.
“It’s a potential disaster for investors who frankly might not be sophisticated enough to understand the risks. This won’t be the last time regulators do something like this, either,” said Matt Burgoyne, a partner at Calgary-based McLeod Law, who runs the firm’s cryptocurrency practice.
The head of investor-rights advocacy group Fair Canada said the OSC had no choice but to act.
“They needed to take this step now. Because there are a lot of investors who really aren’t taking the steps to truly understand who they’re dealing with and what they’re investing in,” said Fair executive director Jean-Paul Bureaud.
Andreas Park, a finance professor at the University of Toronto’s Rotman School of Business, said cryptocurrencies are already a volatile investment, pointing to the fluctuations seen by the world’s best-known cryptocurrency bitcoin. Earlier this year, that digital currency rose higher than $63,000 U.S., but is now hovering just over $37,000. Throw in futures trading and borrowing, and it’s a potentially costly mix, said Park.
“It’s a very volatile underlying asset anyway. And some of these exchanges allow margin trading on crypto futures. You can end up losing $100 for every dollar you invest,” said Park.
In addition to more general hazards, Park pointed out that most cryptocurrency exchanges don’t actually allow investors to hold their cryptocurrency. That, says Park, can be problematic if the exchange goes out of business, is hacked, or worse.
“In most of these exchanges, you don’t actually have custody of your own asset. There are security problems with a lot of the exchanges. Then there are people who simply steal your money,” said Park.
Tuesday’s move comes two months after the OSC issued a warning to cryptocurrency exchanges that they needed to follow securities regulations if they wanted to keep selling to Ontario investors. In their news release Tuesday, the OSC said 70 of the exchanges have since initiated “compliance” discussions with the OSC and other Canadian regulators. Just one exchange — controlled by online brokerage Wealthsimple — has come up with a full compliance plan blessed by the OSC.
The OSC has scheduled an initial hearing into the allegations June 18, but a full “hearing on the merits” — the regulatory equivalent of a trial — might not come for months. After a full hearing, a panel of OSC commissioners would rule on the allegations, and potentially levy penalties. Poloniex could also reach a settlement agreement with the OSC.
Earlier this month, OSC chair Grant Vingoe, in a speech to the Canadian Club, said the sheer scale and pace of cryptocurrency investment was cause for concern.
“In January of this year, global crypto asset market capitalization reached $1 trillion (U.S.) for the first time. Then, in April — just 94 days later — it reached $2 trillion. By way of comparison, that’s larger than the assets under management of all Canadian mutual fund and ETF holdings,” Vingoe said in his speech.
“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. For the OSC, we have determined that registration is the route required to afford investors the critical protections they deserve,” Vingoe added.
While some in the industry may chafe at the prospect of regulation, Burgoyne thinks it could end up being a good for business.
“Look, regulation could become a competitive advantage for the industry in Canada, if it makes it safer to invest in cryptocurrencies,” he said.
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Source: thestar.com
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