The Ontario Securities Commission will begin taking steps to enforce new rules on cryptocurrency trading platforms that have failed to meet an April 19 deadline to contact regulators on how to bring their businesses into compliance.
In late March, Canadian regulators released much-awaited guidelines for domestic and foreign crypto asset trading platforms, requiring them to get in touch with their provincial regulator by April 19 to figure out how to begin the process to become registered as securities dealers. There are hundreds of crypto businesses that facilitate trades in digital tokens for Canadians, but just 36 have begun the process of getting regulated, according to the OSC.
The regulator declined to comment on how many cryptoexchanges it had expected to hear from. But in an e-mail to The Globe and Mail, OSC spokesperson Kristen Rose said that steps will be taken to “enforce applicable requirements under securities law” for platforms that failed to meet the April 19 deadline.
The guidelines released in late March by the Canadian Securities Administrators – an umbrella organization for all 13 provincial and territorial regulators – laid out in detail how existing securities legislation that applies to dealers and issuers of traditional securities will apply to cryptocurrency trading platforms, depending on their exact function.
CSA spokesperson Ilana Keleman told The Globe that “many platforms, both local and foreign” had gotten in touch with regulators. She added that the CSA could not disclose specific numbers about how many platforms had yet to get in touch with regulators, setting them up to be disciplined.
A cryptoexchange platform such as San Francisco-based Coinbase, for example, which facilitates trades of digital assets for Canadians and holds these assets on behalf of users, would be treated by Canadian regulators as a securities dealer. These platforms will also have two years to become members of the Investment Industry Regulatory Organization of Canada (IIROC) which regulates securities dealers, since most of them provide services to retail investors.
“It is never easy for the OSC to bring enforcement, but I think the businesses that have not gotten in touch with regulators are basically low-hanging fruit for enforcement,” said Lori Stein, a partner at Bay Street law firm Osler, Hoskin and Harcourt LLP.
Ms. Stein added that while there are hundreds of crypto companies registered as money-service businesses with the Financial Transactions and Reports Analysis Centre of Canada (FinTRAC) – the agency which works to detect and prevent money laundering – many of these firms do not necessarily have to be registered with securities regulators because of the nature of their operations.
“These regulations only apply to crypto businesses that are custodial platforms … that hold digital assets,” Ms. Stein explained. “There are many, many tiny offshore and domestic businesses that immediately deliver a customer’s digital assets into their wallets … They don’t hold it, so they aren’t classified as entities that trade derivatives.”
The March 29 bulletin from the OSC indicated that the agency had seen a large increase in the number of platforms offering crypto assets or crypto contracts to Ontario residents, which presented “significant risks” to investors.
Matthew Burgoyne, head of the cryptocurrency and blockchain group at Calgary-based law firm McLeod Law LLP, estimated at least half of the businesses that were supposed to get in touch with regulators to figure out how to bring their companies into compliance did not do so.
“I think there could be 30 to 40 more businesses that need to register with regulators,” he said. He added that while the OSC seemed to be taking a more “aggressive” position than other provincial regulators, the agency tends to ease up as soon as businesses are in touch about how to get regulated.
“I will say they are being very helpful in guiding my clients through this process,” Mr. Burgoyne said.
Thus far, only online investment-management company Wealthsimple is currently registered with regulators.
Justin Hartzman, the co-founder and chief executive of Coinsmart, a Toronto-based cryptoexchange, said that his company had completed the initial process of getting regulated by the OSC on March 31.
“The paperwork was cumbersome and took us about three to four weeks, but we had a good compliance team,” Mr. Hartzman said. “I’d recommend businesses start early.”
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