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Ontario’s securities regulator could face challenges in enforcing a ban on unregistered foreign cryptocurrency trading platforms doing trades for Ontario residents, especially if the agency does not receive adequate co-operation from international authorities, legal experts say.

In the past two weeks, the Ontario Securities Commission has launched enforcement actions to suspend the trading of crypto assets on two international exchanges — Poloniex and KuCoin — both based primarily in the Seychelles, located off the coast of Africa.

Poloniex and KuCoin offer crypto trading services to Ontario residents, but neither entity is registered to operate in the province. In late March, the OSC released a warning to unregistered crypto exchange platforms, asking them to contact the agency to begin discussions on becoming registered as a regulated securities dealer. Crypto platforms had until April 21 to do so, but many, including Poloniex and KuCoin have not responded to the warning.

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“The problem with Poloniex and KuCoin is that they are based in the Seychelles and likely have no assets in Canada, so it will be very difficult for the OSC to do anything to actually enforce the penalties and get them to stop facilitating trades for Ontario residents,” said Jonathan Ip of Toronto-based Iterative Law, who specializes in legal issues in the cryptocurrency industry.

There are hundreds of international and domestic crypto exchanges that offer trading services to Canadians, but to date, only 48 have contacted the OSC to begin the process of getting registered, according to the regulator. Just one – the Canadian fintech company Wealthsimple – is registered as a regulated trading platform for crypto assets.

Regulators, both domestically and abroad, are increasingly focusing their attention on how to effectively regulate crypto trading platforms and to ensure the safety of deposits in these exchanges. Most exchanges not only allow users to buy and sell cryptocurrency, but also hold the assets on behalf of users in digital wallets. According to Canadian regulators, this custodian feature effectively designates crypto exchanges as securities dealers, meaning that they have to be registered as such. Regulators in the United States are still debating whether or not these exchanges should be designated as securities dealers.

The OSC is seeking a fine of at least $1-million each for Poloniex and KuCoin, and is asking for a court order stopping the companies from allowing Ontario residents to use their platforms.

Matthew Burgoyne, a partner at McLeod Law in Calgary, says it would be difficult for the agency to collect fines from these overseas companies unless they are pursued by their own domestic regulators. “Practically speaking, it really requires the co-operation of authorities in the Seychelles, because I don’t know how much teeth a ruling in an Ontario Superior Court will have towards a company based in the Seychelles,” he said.

In its notice against both Poloniex and KuCoin, the OSC did indicate that it worked with authorities in the Seychelles to identify the entities operating illegally. The commission declined to offer additional information on how it planned to enforce the trading ban and collect penalties from Poloniex and KuCoin.

“We’re not in a position to comment with the case still needing to be heard before a panel,” said OSC spokesperson Kate Ballotta.

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The OSC’s first enforcement action on on an unregulated crypt dealer was issued on May 25 against Poloniex. To date, however, Ontario residents are still able to sign up for Poloniex accounts and use the platform to buy and sell cryptocurrencies.

“The only way to immediately stop Ontarians from using Poloniex would be to somehow enforce a block of the site in the province,” Mr. Ip said. “So the regulator would have to go to various internet providers with court orders and start that process. This really speaks to some of the challenges in crypto enforcement, where you have so many entities operating overseas, and many of their directors and founders in unknown locations,” he added.

To a large extent however, experts agree that the onus of regulating crypto exchanges falls more on the industry itself, than on regulators’ ability to actually stop them from operating.

Last August, BitMEX, a cryptocurrency exchange also based in the Seychelles, voluntarily blocked Ontario users from using its platform after receiving a warning letter from the OSC. A disclaimer on the company’s site states that it would be illegal for Ontario users to attempt to use BitMEX to trade.

Domestic crypto exchange Netcoins agreed in April to not conduct any trades for Ontario investors unless the exchange is officially registered in the province by Sept. 30, 2021. If that does not happen, the exchange agreed to not open up new accounts for Ontario investors.

Lori Stein, a partner and securities lawyer with Osler, Hoskin & Harcourt LLP, believes that the OSC will be able to get foreign platforms to back out of Ontario simply because the cost of complying is high relative to the size of the market in Ontario and Canada.

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“Ignoring the OSC notice entirely is not a great strategy in managing litigation risk in general,” she said. “The regulators are saying: comply or leave the jurisdiction, so market players are going to have to determine how to navigate those options,” Ms. Stein added.

Mr. Ip called the recent enforcement actions against unregistered crypto platforms a “smart public relations strategy” for the OSC. “It’s not necessarily a matter of whether they can enforce – the regulator is basically signalling to crypto players that they are taking notice and are serious about regulating the industry.”

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