Ontario regulator accuses Poloniex of 'disregarding' securities laws in enforcement action against crypto exchange

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On Tuesday, the Ontario Securities Commission filed a statement of allegations against Poloniex, accusing the crypto exchange of "disregarding Ontario securities law."

Moreover, the terms of the OSC's enforcement against Poloniex point to broader implications for crypto trading platforms that operate in Canada.

Specifically, the enforcement action aims to hold Poloniex "accountable for disregarding Ontario securities law and to signal that crypto asset trading platforms flouting Ontario securities law will face regulatory action."

The regulator noted in its statement:

"Poloniex operates an online crypto asset trading platform (the Poloniex Platform). The Poloniex Platform is available to Ontario residents. Ontario residents have opened accounts on the Poloniex Platform and have used the platform to deposit and trade in crypto asset products. Poloniex is subject to Ontario securities law because crypto asset products offered on the Poloniex Platform are securities and derivatives. Poloniex has nonetheless failed to comply with the registration and prospectus requirements under Ontario securities law."

The subsequent terms of the OSC's case further identify Poloniex's crime not as offering of a security in the form of an initial coin offering — as has often been the practice of the U.S. Securities and Exchange Commission — but as holding assets in custody that renders Poloniex a third party. Effectively, the OSC appears to be arguing that any assets held in custody on a trading platform are themselves securities.

The statement of allegations reads:

"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" 

It concludes its argument by saying: "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."

The notice made reference to a March 29 statement from the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC), in which the two organizations sought to clarify how crypto platforms in the country are governed by relevant regulations. 

Per the OSC's notice, that statement "included a deadline of April 19, 2021 for such platforms to contact Commission staff to start compliance discussions." The OSC further said that Poloniex failed to make contact. 

The regulator seeks CA$1 million (USD$830,000) fines for each "failure to comply," but it does not specify what constitutes a single failure. The first hearing on the matter is scheduled for June 18.

The question of which cryptocurrencies qualify as securities has long plagued the industry, with particular ramifications in the U.S. The OSC has been more sympathetic than the U.S. SEC when it comes to, for example, approval of a Bitcoin ETF, but seems to be establishing a more intensive regime for crypto exchanges in Canada. At the same time, crypto exchanges elsewhere are subject to patchwork regulations that often prove vexing.

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