Introduction and Background
On March 29, 2021, the Investment Industry Regulatory Organization of Canada and the Canadian Securities Administrators released a notice that provided guidance on the application of securities law to crypto-trading platforms (“CTPs”). Crawley MacKewn Brush LLP previously summarized the notice here.
Around the same time as the notice, the Ontario Securities Commission (“OSC”) directed CTPs to contact OSC staff by April 19, 2021 to discuss how to bring their operations into compliance with Ontario securities law, failing which “steps will be taken to enforce applicable requirements under securities law”.
Since the publication of the notice and the OSC’s warnings, staff of the OSC have taken enforcement action against non-compliant entities. This has involved significant monetary penalties and suggests that the OSC (now the Capital Markets Tribunal) is committed to attempting to protect investors in the crypto markets through aggressive enforcement action. This article summarizes recent regulatory developments and expectations for crypto regulation.
OSC Targets Foreign CTPs
The OSC recently released reasons for its approval of orders against non-Ontario CTPs, one of which proceeded by way of settlement and both of which involved fines of at least $2 million. These proceedings are described below, followed by an analysis of the decisions.
(i) In the Matter of ByBit Fintech Limited
The first OSC decision relates to Bybit Fintech Limited (“Bybit”), a Seychelles entity. Bybit operates a CTP on which Ontario investors could trade in securities and derivatives based on exposure to underlying assets that included crypto assets. In particular, Bybit focuses on facilitating the trading of crypto asset futures contracts and its platform allows investors to engage in leveraged trading of up to 100:1 on various futures contracts. Between 2018 and 2022, Bybit opened approximately 370 accounts for Ontario investors.
In June 2021, the OSC commenced an enforcement proceeding against Bybit. Bybit, despite missing the April 29, 2021 deadline to contact the OSC, engaged with OSC staff after the enforcement proceeding was commenced. Bybit also cooperated throughout the OSC’s investigation and entered into a settlement agreement with the OSC.
Under the settlement, Bybit admitted to contravening Ontario securities law by engaging in the business of trading in securities without registration and by engaging in primary distributions of securities without a prospectus. The terms of the settlement required Bybit to:
(ii) In the Matter of Mek Global Limited and PhoenixFin Pte. Ltd.
The second OSC decision related to Mek Global Limited, incorporated in the Republic of Seychelles, and PhoenixFin Pte. Ltd., incorporated in Singapore (collectively known as “KuCoin”). KuCoin is a significant player in the global crypto asset investment market, offering investors a variety of services including the ability to buy and trade crypto asset products and derivatives. On the KuCoin platform, investors can use fiat currency to facilitate purchases of crypto assets, deposit their own crypto assets, engage in “spot” and margin trading, and trade perpetual futures contracts whose value is derived from crypto assets.
In June 2021, the OSC also commenced proceedings against KuCoin. Unlike Bybit, KuCoin failed to engage with the OSC and participate in the proceedings (despite notice to it).
The OSC found, solely based on evidence from and submissions by OSC staff, that KuCoin also improperly distributed securities without a prospectus or any exemption from the prospectus requirements, in contravention of Ontario securities law. KuCoin did so by permitting Ontario residents to open accounts on its platform and by encouraging high-leverage crypto asset trading strategies using margin and futures.
As a result, the OSC imposed a $2 million penalty, approximately $100,000 in costs, and a permanent prohibition becoming or acting as a registrant or as a promoter.
The KuCoin decision is significant in that:
Analysis and Conclusion
The ByBit and KuCoin decisions are demonstrative of the seriousness with which OSC staff are treating non-compliant CTPs and players in the crypto space. There was only a two-month gap between the deadline to bring platforms into compliance (in accordance with the above-noted notice) and the commencement of enforcement proceedings against ByBit and KuCoin, suggesting that the OSC will likely be even less tolerant of other currently offside CTPs.
The decisions also seem to reflect or signal: (i) the OSC’s relative leniency for cooperative respondents and, conversely, a more hawkish response towards non-cooperative or non-responsive respondents and, (ii) a caution to unregistered CTPs who wish to operate in Ontario, and even to registered CTPs that wish to avoid the OSC’s gaze. It is also clear that the OSC is taking jurisdiction over non-traditional security instruments as part of its broad mandate to protect all corners of the capital markets.
 Defined in the settlement agreement as “any contracts that involve leverage, margin, or the extension of credit, including but not limited to contracts that are marketed/labelled by Bybit as: (i) futures; (ii) forward contracts; (iii) OTC contracts on margin; (iv) perpetual swaps and futures; (v) rolling spot; (vi) contracts for difference; (vii) options; or (viii) leveraged tokens”.
 OSC’s Reasons and Decision at para 10.
 OSC’s Reasons and Decision at paras 21-26.
 OSC’s Reasons and Decision at paras 34-42, citing Ontario Securities Commission v Tiffin, 2020 ONCA 217 at para 29: “The Ontario Court of Appeal, in the recent case of Tiffin, stated that the Act uses very broad terms “and thereby captures a great many instruments and activities in its wide regulatory scope” and then provides many exemptions “to tailor this regulatory scope to its purposes…In interpreting “security”, the Tribunal must adopt a purposive approach. This includes considering the Commission’s investor protection objective. Investor protection is an “overarching lens” through which an instrument must be assessed, to ensure that the interpretation of the term “security” “is flexible and capable of adaptation to address the breadth and variability of investment schemes devised in the capital market”.
 The OSC may order a person or company found to have breached securities law to pay up to $1 million for each failure to comply.
 OSC’s Reasons and Decision at paras 125.