Adam Chisholm is a partner and group head of the complex disputes and regulatory regimes group at McMillan LLP and has experience in securities regulatory and administrative law. The views expressed are his own.
Is bitcoin a security? A commodity? Something else? These simple questions have traditionally not had simple answers, even in places where there are modern securities laws.
There is one difference between jurisdictions around the world, however. The Ontario Securities Commission (OSC) – Canada’s de facto chief regulator, given the province’s status as a financial centre – has chosen to align with the United States in taking zealous enforcement action against cryptocurrency trading platforms.
The recent implosion of the US$32-billion-dollar, Bahamas-based FTX exchange has thrust this issue into the headlines again. U.S. Sen. Elizabeth Warren, a well-known crypto critic, said on Wednesday: “We need more aggressive enforcement.”
Effective regulation of cryptocurrency and other blockchain activities, however, requires well-known rules and international co-operation – not just enforcement. Without these traits, even well-intentioned securities regulatory enforcement efforts with respect to cryptocurrency and blockchain activities are unduly discretionary, discriminatory and ineffective.
Brian Armstrong, chief executive of the exchange Coinbase Global Inc., takes this idea a step further and suggests the FTX implosion was the direct result of aggressive enforcement.
In his response to Sen. Warren, Mr. Armstrong said: “FTX.com was an offshore exchange not regulated by the [Securities and Exchange Commission]. The problem is that the SEC failed to create regulatory clarity here in the U.S., so many American investors (and 95 per cent of trading activity) went offshore.”
In Canada, regulatory attention has primarily focused on cryptocurrency trading platforms. Unfortunately, even regulation of this one segment of the blockchain industry has been distressed with uncertainty.
In November, 2021, a company operating a cryptocurrency trading platform received an “interim, time-limited registration” from the OSC. In this registration decision, the platform was obligated to disclose to prospective clients that “no securities regulatory authority has expressed an opinion about the Crypto Contracts or any of the Crypto Assets made available.” This ambiguity extended to even the simple matter of whether “the Crypto Assets are not themselves securities and/or derivatives.”
Thus, the commission asked the platform to acknowledge the existing regulatory uncertainty to its clients, even while taking jurisdiction over its activities.
This continuing uncertainty has not, of course, stopped or slowed the demand for cryptocurrency and related services. There are today more than 200 cryptocurrency exchanges available online, and most can be accessed by Canadians.
In May, 2021, the OSC announced that more than 70 crypto asset trading platforms had initiated discussions with Canadian securities regulators. As things stand, just 10 platforms are registered with the commission.
The companies that have sought or are seeking regulatory approval in Canada should be applauded for being willing to invest significant financial and other resources to obtain registration while the OSC and other regulators develop their approach. It is in everyone’s interest for these companies to service the Canadian market and for Canadians to have access to the benefits these registered entities offer. They may well become market leaders or accrue other advantages.
Clearly, however, not every entity is willing to make a similar investment. The OSC maintains an investor warnings and alerts list. There are 427 entities currently on the list, many of which are in the cryptocurrency space. In October, 2022, alone, the OSC issued investor warnings and alerts for more than the total number of companies registered with the commission.
The OSC warns that these “companies are not registered to deal or advise in securities in Ontario,” and the list warns of “possible harmful or illegal activity in progress.” Which of the 427 entities are engaged in “harmful activity” and which are simply not registered in Ontario? While that distinction may be moot in the eyes of the commission, it is what would matter most to Canadians.
One impetus for this ramped-up regulatory action is obvious and acknowledged by the OSC. A significant number of people in Canada lost access to millions of dollars in digital assets in 2019 when the QuadrigaCX platform went under and its founder was announced dead.
No doubt, the FTX saga, hot on the heels of similar implosions such as those of the currency terraUSD and the Celsius Network Ltd. trading platform, will similarly galvanize the will for more aggressive enforcement.
But let’s not forget that the collapse of Quadriga, while providing a persuasive argument in favour of regulation generally, did not result in legislative amendment of any kind in Canada or any clear guidance about the application of securities laws to cryptocurrency or blockchain activities.
Domestic securities enforcement tools apply unevenly to much of the activity undertaken by Canadians. International co-operation or, at least, alignment may be the best step toward effective regulation.
Until then, those involved in the crypto space – the well-intentioned and unprincipled alike – may simply base themselves outside of Canada, the way Mr. Armstrong says FTX had eschewed the U.S. Without even enforcement, Canada loses the benefit of housing potentially innovative initiatives while bad actors can persist.
Regulation through enforcement also results in festering questions. In what other circumstances will the discretion of securities law enforcement be triggered? This question remains not only for existing blockchain activities, such as cryptocurrency mining and non-fungible token sales, but also innovative practices that have not yet hit the zeitgeist.
The Supreme Court of Canada has referred to the rule of law as a highly textured expression that involves known legal rules. Yet there is an absence of known and clear legal rules in the cryptocurrency and blockchain space in Canada. Clearer and explicit prospective rules would be welcome from legislators, if not regulators.