The Ontario Securities Commission (OSC) appears to be kicking off a new era of compliance for crypto exchanges operating in Canada, based on the specifics of OSC's enforcement action against Poloniex.
Since the beginning of 2020, the Canadian Securities Administrators (CSA) had been signaling to exchanges that things were going to change. The CSA encompasses Canada's various provincial and territorial securities authorities, the largest of which is the OSC, which regulates the Toronto Stock Exchange.
Like the U.S., Canadian authorities are comfortable treating decentralized crypto assets like bitcoin or ether as commodities rather than securities.
The Poloniex enforcement action documents indicate, however, that exchanges holding custody of their customers' crypto assets would fall under the purview of securities regulations.
Here's the relevant text:
"Investors do not have possession or control of crypto assets deposited or traded on the Poloniex Platform. Rather, they see a crypto asset balance displayed in their account on the Poloniex Platform. In order to take possession of crypto assets reflected in their Poloniex account balance, an investor must request a withdrawal and is dependent on Poloniex. While Poloniex purports to facilitate trading of the crypto assets in its investors’ accounts, in practice, Poloniex only provides its investors with instruments or contracts involving crypto assets. These instruments or contracts constitute securities and derivatives."
Grant Vingoe, the chairman and CEO of the OSC, spoke about this state of affairs during a virtual event earlier this month.
"What the investor ends up having is a ledger entry. They're subject to the creditworthiness of the platform and its willingness to deliver," Vingoe said.
He went on to say:
"In that case, the security involved is not the bitcoin or ether itself, it's actually the combination of contractual rights including the exposure of the client to the ability of the platform to deliver it. So that's where the security is created. We think what the investor has in those cases is the right to obtain a commodity, and that right is either a security or a derivative."
Indeed, it was in keeping with this policy that the OSC notified crypto exchanges in March that they had until April 19 to contact the regulator as to how to get their operations in line with these regulatory expectations. At the heart of the Poloniex action is its alleged failure to contact the OSC.
The significance of the Poloniex action is that it signals the OSC isn't taking an idle approach. A representative for the OSC told The Block that 70 exchanges had reached out to begin compliance talks. However, "to date, there is only one crypto asset dealer registered with Canadian securities regulators (WealthSimple)."
Though it's unlikely that the OSC will need to begin proceedings against all of these exchanges, one possible outcome is that some market participants will exit the market entirely.
"With respect to Ontario, it says that Poloniex did not respond to its correspondence to engage in the regulatory process and ergo, it is forced by a Canadian government agency now, to exit the country," lawyer Christine Duhaime told The Block in an email.
Duhaime went on to say:
"I expect we will see that across numerous exchanges in respect of the Canadian market. Some don’t care because it's quite a small market and the costs of meeting Canadian regulatory requirements may not be worth it considering the small market size so they each are undertaking an assessment."
Poloniex could not be reached for comment by the time of publication.
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