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Globe Investor Securities regulators crack down on cryptocurrency-related investment fraud

Canadian securities regulators have teamed up with their U.S. counterparts in “Operation Cryptosweep,” a pan-North America crackdown on fraudulent cryptocurrency-related investment schemes.

More than 40 provincial and state regulators across Canada and the United States took part in the initiative, including the Ontario Securities Commission, the British Columbia Securities Commission and the Alberta Securities Commission.

The aim of Operation Cryptosweep was twofold: to launch regulatory proceedings against bad actors and to warn investors about unregistered and fraudulent initial coin offerings and other cryptocurrency-related investment products.

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Initial coin offerings, or ICOs, are a new method of fundraising, similar to crowdfunding, in which companies sell digital tokens to finance a venture. Some companies have managed to raise millions of dollars very quickly using this method, with little more than a white paper outlining their business plan.

“Fraudsters are always looking for new ways to attract victims and many are taking advantage of the popularity of cryptocurrencies to perpetrate their schemes,” Doug Muir, director of enforcement at the BCSC, said in a statement.

The B.C. regulator says it issued letters to 12 offshore companies that advertise their ICOs in the province or allow B.C. residents to participate in their token sales. The BCSC has asked them to cease their activities in British Columbia and only resume once they are compliant with the province’s securities laws.

Ontario’s securities regulator issued an alert last week cautioning investors about five cryptocurrency firms – BTCReal, BitSerial, Hypercube Ventures LP, CabinCoin OU and BaapPay Inc. – that are not registered in the province to solicit investments or provide advice on the buying or selling of securities.

The Globe and Mail reported last month that the OSC had sent out a wave of letters to cryptocurrency firms requesting more information about how their businesses operate. Those who had done ICOs or operated cryptocurrency exchanges were the targets of the information requests.

In Alberta, regulators have supported the initiative by using social media to raise awareness about the risks of investing in cryptocurrencies, an ASC spokeswoman said in an e-mail.

Regulators around the globe have been on high alert recently for cryptocurrency firms that have run afoul of securities laws, for instance by selling unregistered securities through coin or token offerings.

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Although some have taken the position that the digital tokens are not securities, U.S. Securities and Exchange Commission chairman Jay Clayton told a Senate hearing earlier this year that every ICO he has seen looks like a security.

The Canadian Securities Administrators – an umbrella organization of provincial securities regulators – said last summer that it will decide on a case-by-case basis whether or not a particular token offering constitutes a security.

The North American Securities Administrators Association (NASAA), which includes the OSC among its members, said in a statement that Operation Cryptosweep has resulted in nearly 70 inquiries and investigations and 35 pending or completed enforcement actions since the beginning of May.

“The persistently expanding exploitation of the crypto ecosystem by fraudsters is a significant threat to Main Street investors in the United States and Canada,” Joseph Borg, NASAA president and director of the Alabama Securities Commission, said in a statement.

“Cryptocriminals need to know that state and provincial securities regulators are taking swift and effective action to protect investors from their schemes and scams.”

Mr. Borg added that although not all ICO or cryptocurrency-related investment products are fraudulent, investors should approach all such investment vehicles with “extreme caution.”

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