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Ontario’s securities regulator has launched a probe of the cryptocurrency industry after receiving complaints that some firms may have violated securities laws, The Globe and Mail has learned.

The commission’s enforcement and market regulation branches have sent out a wave of letters to cryptocurrency firms requesting more information about how their businesses operate. The targets of the inquiries include cryptocurrency exchanges, where users can buy or sell digital currencies such as bitcoin, as well as companies engaged in initial coin offerings, or ICOs, according to sources familiar with the matter.

ICOs are an emerging form of fundraising, similar to crowdfunding, in which companies sell digital tokens or coins to finance their ventures. Unlike highly regulated public offerings of debt and equity, ICOs typically occur outside the purview of securities regulators such as the OSC, which means there are no rules governing disclosure or protecting investors.

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The Ontario Securities Commission confirmed the investigation, saying in an e-mail that it is gathering information about several cryptocurrency trading platforms in Ontario that may be offside of securities laws.

“To date, none [of the platforms] have been recognized as an exchange, or exempted from recognition,” OSC spokeswoman Kristen Rose said. “We have received a number of complaints.”

The move by Ontario’s securities watchdog is in line with a recent probe by the U.S. Securities and Exchange Commission (SEC). In late February, the U.S. regulator issued dozens of subpoenas and information requests to technology firms and advisers in the cryptocurrency market, according to The Wall Street Journal.

The total number of letters issued by the OSC is unknown, but sources familiar with the matter characterize it as a broad fact-finding mission that may lead to enforcement action down the road.

The Globe viewed one of the letters, which was sent earlier this year and marked “confidential.” It contains a list of detailed questions regarding the company’s operations and requests a response within several weeks.

Cryptocurrency companies have recently found themselves in the crosshairs of regulators in other countries, which have signalled that some of those firms may have run afoul of securities laws, for instance by selling unregistered securities. Earlier this year, SEC chairman Jay Clayton told a U.S. Senate hearing that every initial coin offering he has seen has the characteristics of a security.

The Canadian Securities Administrators – an umbrella organization of provincial securities regulators – published a staff notice last summer that said it will decide on a case-by-case basis whether a particular digital token offering constitutes a security. The Aug. 24 notice also stated that platforms that allow users to trade tokens or coins may classify as marketplaces and would therefore need to comply with government regulations for marketplaces, or obtain an exemption from those rules.

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Daniel Fuke, a lawyer at Fasken Martineau DuMoulin LLP who advises cryptocurrency companies, said the industry has evolved so fast that its participants have had to operate without clear guidance regarding regulations.

“In light of that, we hope that regulators will work with companies who have proactively established their businesses responsibly with prudent customer and investor protections rather than retroactively sanctioning them based on regulations that weren’t known to be applicable,” Mr. Fuke said.

Regulators are on high alert about initial coin offerings owing to reports of rampant fraud. Some early-stage companies have raised millions of dollars very quickly with little more than a white paper outlining their plans. Coin offerings have raised a total of US$8.84-billion since 2014, according to cryptocurrency website CoinDesk.

Regulators have taken action against a number of coin offerings. In February, the OSC issued a temporary cease trade order against USI Tech Limited, Eleanor Parker and Casey Combden, cautioning investors that the three parties appeared to be involved in a multilevel marketing scheme that encouraged investors to purchase bitcoin packages.

And last year, both the Autorité des marchés financiers in Quebec and the SEC took action against the creators of a virtual currency called PlexCoin for allegedly defrauding investors.

The Globe and Mail's law reporter Jeff Gray joins Affan Chowdhry to answer your questions on bitcoins Globe and Mail Update

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