The B.C. Securities Commission (BCSC) and provincial counterparts appear handcuffed in enforcing investment regulations against foreign-registered online cryptocurrency exchanges.
Some have not responded to hearing notices and those that have been banned in Canada may still offer accounts to British Columbians.
Many foreign cryptocurrency exchanges do not sell cryptocurrency assets but instead offer contractual rights to those assets.
Commissions have ruled that these interests are derivatives—what the BCSC deems to be a regulated instrument that derives its value from an underlying asset, in this case a cryptocurrency.
As such, cryptocurrency exchanges are required to register with a provincial securities regulator in Canada and follow certain guidelines.
However, many are not registering, and when a commission such as the BCSC comes knocking, no one appears to be home.
Take, for instance, the recent BCSC enforcement action against Cayman Islands-based LiquiTrade Ltd. that has been operating a trading platform named Latoken, which the commission stated was marketed to B.C. residents.
LiquiTrade was issued a hearing notice for allegedly running an unauthorized exchange in B.C.
The company never responded to the commission’s notice, and on July 3, a hearing panel found that LiquiTrade—despite not being registered under the B.C. Securities Act—facilitated trading by “several means,” including creating a derivatives trading market and promoting derivatives that trade on Latoken.
According to the panel ruling, BCSC investigators signed up on Latoken using a B.C. IP address and began trading. (They happened to discover the exchange also requires a minimum amount of assets to leave the exchange.)
“Regardless of where they are located, platforms that facilitate Canadians’ buying and selling of crypto assets must register with provincial or territorial securities regulators and abide by certain conditions to help protect investors,” the commission stated following the panel’s ruling.
LiquiTrade now faces a sanctions hearing where it could be banned and fined.
KuCoin, operated by Mek Global Ltd.—incorporated in the Republic of Seychelles—is one of four online cryptocurrency exchanges banned by Canadian commissions.
On June 21, 2022, the Capital Markets Tribunal in Ontario found “the company has not complied with Ontario securities law or has not acted in the public interest” after it “did not participate” in its hearing and “did not file any materials with respect to the merits and sanctions and costs hearing.” It was banned and fined $2 million. Those sanctions are said to be reciprocated by the BCSC.
KuCoin has not paid its fine and still has an active website available to British Columbians, who may sign up for an account.
BIV found KuCoin’s terms of use state that a user may not be a resident of the U.S., Hong Kong, China or Ontario. There is no mention of B.C. Upon signing up, the website has an option to list Canada as a user’s place of residence.
BCSC spokesperson Brian Kladko conceded there are difficulties in enforcing rulings against foreign-registered online cryptocurrency exchanges.
“In general, enforcement of sanctions against online platforms located in other countries is more difficult than enforcement against residents and entities in B.C.,” stated Kladko.
Still, the commission maintains its enforcement work provides value.
“Public sanctions have value even if they are not enforced because investors who do their research can avoid dealing with disciplined people and entities,” he said.
While Kladko said that securities regulators have a range of tools and strategies for enforcing orders, he added that they “generally don’t discuss them publicly because it could undermine their effectiveness.”
Securities law expert Cristie Ford, a law professor at the University of British Columbia, said investors ought to exercise caution when investing in cryptocurrencies, and especially when doing so on “DIY” exchanges.
“The scope of the problem is really significant,” said Ford, adding that “a fractured regulatory environment” with provincial securities commissions doesn’t help.
