Inter-jurisdictional enforcement against cryptocurrency-related financial products

  • Waleed Malik
  • Evan Thomas
Topics:

Mar 7, 2019

In its first enforcement decision concerning cryptocurrency, the Ontario Securities Commission permanently prohibited USI-Tech Limited from trading in securities or derivatives based on its promotion of cryptocurrency-related financial products in Ontario. To obtain this order, OSC Staff used an expedited procedure for inter-jurisdictional enforcement proceedings, relying upon an earlier decision by Québec’s Financial Markets Administrative Tribunal (FMAT) finding that USI-Tech had illegally distributed securities and engaged in dealer activities without being registered.

The decisions illustrate how Canadian securities regulators can and will take regulatory action against cryptocurrency-related financial products promoted or offered to Canadian investors from foreign jurisdictions. The decisions also show how orders by one securities regulatory authority can be enforced by other authorities to allow a coordinated enforcement response where investments are solicited online from investors in multiple jurisdictions.

Background

USI-Tech is a company purportedly headquartered in Dubai offering various financial products, including a “Bitcoin Package”, which offered a return of 1% per day for 140 days to be generated through bitcoin trading using automated trading software, and a crypto-asset token that offered potentially astronomical returns.

FMAT proceedings

In early 2018, Québec’s Autorité des marchés financiers (AMF) brought an urgent application before the FMAT against USI-Tech and two individuals. The AMF alleged that USI-Tech and the two individuals had promoted USI-Tech’s financial products in Québec, including on social media and by organizing meetings with potential investors. The AMF also brought forward evidence that a number of Québec investors had invested significant amounts in USI-Tech’s products.

The FMAT concluded in its decision that the products offered by USI-Tech were “investment contracts” under the Québec Securities Act, and that USI-Tech and the individuals had conducted an illegal distribution of securities and engaged in dealer activities without complying with applicable securities law. The FMAT issued an order against USI-Tech and the individuals directing them to cease trading in securities and to remove certain web sites and social media pages.

OSC proceedings

In February 2018, while the proceedings in Québec were pending, the OSC obtained a temporary cease trade order against USI-Tech and two individuals allegedly promoting USI-Tech’s products in Ontario.

OSC Staff then applied for a permanent order against USI-Tech. Staff relied upon the FMAT’s orders and s. 127(10) of Ontario’s Securities Act, which allows the OSC to make an order if a person is subject to an order made by a securities regulatory authority in another jurisdiction.

In its decision issued on February 22, 2019, the OSC found USI-Tech’s conduct would likely have constituted serious breaches of the Ontario Securities Act. The OSC noted evidence that several Ontario investors had suffered losses as a result of investments in USI-Tech’s products. As USI-Tech had failed to provide compelling reasons to deviate from the general principle of coordinating securities regulatory regimes, the OSC relied on the FMAT’s decision in issuing an order permanently prohibiting USI-Tech from trading in securities or derivatives.

Practical implications

  • Offering investments products – cryptocurrency-related or otherwise – online from foreign jurisdictions does not prevent Canadian securities regulators from taking action where Canadian investors are solicited for investment and especially where they suffer investment losses.
  • Canadian individuals who solicit or promote investments in foreign-based cryptocurrency-related investment schemes are at risk of regulatory or other actions for dealing in securities without being registered under Canadian securities laws.
  • As cryptocurrency-related financial products may be offered to investors in multiple jurisdictions, the OSC and other securities regulators can be expected to use s. 127(10) and analogous provisions to enforce orders from other jurisdictions to minimize duplicative investigations and litigation. Companies and individuals that do not respond to enforcement proceedings in foreign jurisdictions where they do not reside therefore face the risk of the foreign authority’s order being enforced against them in the jurisdiction where they are resident.