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The stunning implosion of FTX Ltd. has derailed its plans to officially launch in Canada, but it’s unclear if regulators in this country were even able to peer into the books of the cryptocurrency exchange as part of their due diligence on the company that now faces potentially criminal liability.

Months before it filed for bankruptcy amid a scandal that continues to reverberate across the global crypto industry, FTX was on course in June to acquire Bitvo Inc., a Calgary-based crypto exchange regulated by all 13 provincial and territorial securities commissions in Canada. It was one of several opportunities Canadian regulators were ostensibly provided to look closely at FTX’s finances.

Bahamas-based FTX had already been operating in Canada, despite not having regulatory approval. Retail investors were able to hold digital wallets on FTX’s platform to store their crypto, with many using VPN technology, which anonymized their Canadian location and created a private network from a public internet connection.

Still, FTX wanted a “real Canadian footprint” and this was only the beginning of its move into this country, the company’s founder and former chief executive officer Sam Bankman-Fried had told The Globe and Mail then.

“We’re looking to expand in places where regulators are working with the sector to create meaningful opportunities,” Mr. Bankman-Fried had said. The Alberta government had hailed the launch, calling it a vehicle to “further grow our reputation and our opportunities in technology, and innovation.”

Now, all of that has fallen apart.

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Bitvo announced Tuesday that owner Pateno Payments Inc. has terminated the deal with FTX, which was previously expected to be finalized in the third quarter of this year.

On top of that, FTX is facing a criminal investigation in the Bahamas, according to a news release by the Caribbean country. And U.S. prosecutors – including the Justice Department, the Securities and Exchange Commission and the Commodity Futures Trading Commission – are investigating how FTX had been handling customer funds, Reuters first reported this week.

FTX was funneling customer assets worth nearly US$10-billion to an affiliated trading firm, Alameda Research, which is also owned by Mr. Bankman-Fried and has since suspended its operations, the Wall Street Journal and crypto publication CoinDesk reported.

Alameda allegedly invested FTX assets in risky bets, in contravention of FTX’s own terms of service and against common industry norms, which require market brokers and exchanges to keep customer funds separated from company assets.

A spokesperson for FTX declined to comment.

It is a situation that raises many questions for Canadian regulators, which have struggled to control international crypto players skirting rules to operate here. The CEO of the Ontario Securities Commission, Grant Vingoe, recently called it a dilemma on multiple levels: insufficient co-ordination in developing a cross-country regime for crypto platforms, finite resources and non-compliance by companies in the sector when facing sanctions.

In an interview Tuesday, Bitvo CEO Pamela Draper said her company does not have any material exposure to FTX or the company’s cryptocurrency, FTT, beyond the now-cancelled acquisition deal.

When the deal was first announced, neither FTX nor Bitvo revealed the exact terms or valuation. It was pending regulatory approval and Bitvo was not allowed to look into FTX’s books, though FTX had been able to go over Bitvo’s finances.

“We were not given an opportunity to perform due diligence,” Ms. Draper said.

Due diligence is what first revealed the cracks in FTX’s finances last week.

FTX was planning to sell itself to rival Binance Holdings Ltd. after announcing a “liquidity crunch.” But shortly after performing due diligence, Binance said it was walking away from the rescue takeover, issuing a statement that alluded to discrepancies in FTX’s books and expressed concerns about how it was handling customer assets.

The Ontario Teachers’ Pension Plan had its own opportunity to conduct due diligence into FTX. Teachers said last week that it invested a total of US$95-million in FTX over two rounds: US$75-million in October, 2021, followed by US$20-million in January, 2022.

This week, Teachers spokesperson Dan Madge would not say whether it performed due diligence before it invested in FTX.

The Financial Services Regulatory Authority of Ontario (FSRA) said in a statement that it expects Teachers and other pension funds it regulates to follow “robust risk management practices.”

“Pension plan administrators are expected to understand and manage investment risks as per the standard of care required by the Pension Benefits Act,” FSRA spokesperson Russ Courtney said in a statement. “The Act requires pension plan administrators to oversee the plan with the same care and diligence expected when an individual deals with someone else’s property.”

Mr. Courtney declined to say if due diligence on FTX was done by Teachers.

In the case of Bitvo, due diligence would be the purview of the Alberta Securities Commission (ASC), which was spearheading the approval for its deal with FTX and is a principal regulator for the operations at the Calgary company, according to the OSC. JP Vecsi, a spokesperson for the OSC, declined to comment further and referred The Globe to the ASC.

The ASC declined to comment. “It is premature for us to comment upon the circumstances surrounding Bahamas-based FTX at this time,” said Theresa Schroder, communications adviser at the ASC, referring The Globe back to Bitvo.

Collapsed crypto exchange FTX was engulfed in more chaos on Nov. 12 when the company said it had detected unauthorized access and analysts said hundreds of millions of dollars of assets had been moved from the platform in 'suspicious circumstances.'

Reuters