Canadian investors at risk as number of unregulated cryptocurrency exchanges explodes

Representations of the Ripple, Bitcoin, Etherum and Litecoin virtual currencies are seen on a PC motherboard. PHOTO BY DADO RUVIC/REUTERS ILLUSTRATION FILES

 

An analysis by The Logic found there are now more than 600 companies that offer cryptocurrency trading services in Canada but that have not registered with securities regulators

When Quadriga founder Gerald Cotten died in December 2018, over 76,000 investors lost a combined $169 million, money that couldn’t be recovered from the unregulated Vancouver-based cryptocurrency platform largely as a result of what an Ontario Securities Commission investigation found was fraudulent trading. Since Cotten’s death, the price of Bitcoin has shot up more than 1,500 per cent, breaking the US$60,000 mark for the first time earlier this month. An analysis by The Logic found there are now more than 600 companies that offer cryptocurrency trading services in Canada but that have not registered with the country’s securities regulators, with no evidence any of them have faced any penalties from Canadian authorities. Just four years ago, Canadians interested in buying and selling Bitcoin, Ethereum and other cryptocurrencies had limited options, with only Quadriga and a handful of Bitcoin ATMs accepting Canadian dollars.

The only crypto-asset trading platform that has registered for relief from regulatory requirements through the Canadian Securities Administrators is Toronto-based online investment service Wealthsimple. Chief executive Michael Katchen said the proliferation of unregistered crypto exchanges is concerning for investors, and cited Quadriga as an example of the worst-case scenario of what can happen in the absence of robust regulation and enforcement. «We know we have had crypto disasters in the not-too-distant past in Canada, with Quadriga. The scale of this industry is bigger by many multiples, if not orders of magnitude, today,» said Katchen.

«I think many Canadians assume this industry is regulated given the response to Quadriga and public messaging, and that’s concerning. Most of these platforms do not have to meet the standards of a registered dealer, bank or trust company». Even before the recent Bitcoin boom enticed new businesses to enter the lucrative market en masse, regulators around the world were struggling to keep up with the industry, which trades in a product that’s explicitly designed to resist government control. Bitcoin was created to let individuals conduct financial transactions without the need for governments, central banks or financial institutions acting as middlemen.

However, almost everyone gets paid in currencies issued by central banks, which means people need exchanges to convert their money into Bitcoin and other cryptocurrencies. In January 2020, the CSA issued a staff notice asserting that provincial securities regulators had jurisdiction over virtual-currency dealers that hold coins in custody for their customers. The notice states that while the most popular cryptocurrencies are not themselves securities, the contracts many trading platforms enter into with customers are. According to the CSA’s guidance, platforms that do not make «immediate delivery» of cryptocurrencies, but rather hold them until customers want to sell them or transfer them to their own digital wallets, are entering into a derivative contract that is subject to securities regulation.

While some exchanges immediately deliver cryptocurrencies to an external wallet controlled by the client, most don’t. The model most major exchanges employ would appear to be covered by the CSA’s definition of securities dealing. Some of the virtual currency dealers registered with FINTRAC, such as Bitcoin ATMs, may qualify as making «immediate delivery» of cryptocurrencies and fall outside what the CSA consider their jurisdiction. In an email, CSA spokesperson Ilana Kelemen declined a request for an interview, saying the organization «plans to publish a notice shortly on steps that platforms need to take to comply with securities legislation.» Spokespeople for the Ontario Securities Commission and the B. Matthew Burgoyne, head of the cryptocurrency and blockchain group at McLeod Law in Calgary, said his advice to companies in the industry would be to try to stay on the right side of the guidance, since such a legal challenge would be expensive and time-consuming.

Wealthsimple Crypto customers can only invest in two cryptocurrencies , have a $30,000 annual trading limit, and can’t transfer the coins to their own digital wallets or use them to make purchases. Katchen said those restrictions mean investors who want to invest larger amounts, buy different cryptocurrencies, or take control of their coins are forced to do business with competitors that aren’t subject to the same oversight. «Anyone who has done that research and made that choice, their only option is to invest with an unregulated platform,» Katchen said. In June 2020, digital-currency firms came under the jurisdiction of another type of regulator, when the federal government recognized them as money-services businesses under the Proceeds of Crime and Terrorist Financing Act.

FINTRAC requires all companies that direct their services at Canadians, regardless of where they’re headquartered, to register as money-service businesses and comply with requirements meant to ensure they’re not being used for illegal purposes.

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Source: The Logic, Claire Brownell | Financial Post