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OSC Issues Orders Against Foreign Crypto Trading Platforms KuCoin and ByBit

On June 22, 2022, the Ontario Securities Commission (OSC) released reasons in its first two decisions against operators of foreign-domiciled crypto trading platforms (CTPs) offering services to Ontario residents: In the Matter of Mek Global Limited and PhoenixFin Pte. Ltd. (KuCoin) and In the Matter of ByBit Fintech Limited (ByBit). The ByBit decision approves a settlement agreement. The KuCoin decision is the result of a written hearing which was not defended by KuCoin respondents.

Both CTPs offer high-risk crypto asset investment products to retail investors, such as margin accounts and perpetual futures contracts which provide up to 100x leveraged exposure to underlying crypto assets.

Both decisions impose significant monetary penalties against the respondent CTPs, with approximately C$2.1 million payable in KuCoin and US$2.5 million payable in ByBit. However, the market restrictions imposed against each CTP varied significantly, largely based on the marked differences in their level of cooperation with the regulator: permanent market bans were imposed on KuCoin whereas limited market restrictions were placed on Bybit.

Important Takeaways for CTPs with Ontario Clients

The decisions demonstrate:

  • a desire on the part of the Ontario Securities Commission to ensure unlicensed CTPs are registered or diligently pursuing registration or will otherwise face potentially serious consequences.
  • that trading accounts on custodial CTPs (“Crypto Contracts”) will be regulated as securities, and the new Ontario Capital Markets Tribunal supports this legal characterization
  • the dangers for CTPs of not defending a proceeding or failing to cooperate with OSC Staff once a proceeding has been commenced
  • the imposition of restrictive undertakings on CTPs while they are working towards registration
Facts underlying KuCoin and ByBit Differ

In KuCoin, the respondents (together, KuCoin) never participated in the proceeding and the Panel’s findings were based solely on the evidence and arguments submitted by OSC Staff. Kucoin’s failure to participate also led to adverse inferences being drawn by the Panel based on no contrary evidence from KuCoin in response to the evidence led by OSC Staff. The Panel imposed a permanent ban of KuCoin from the Ontario capital markets. The Panel also concluded that all spot, margin and derivative products offered on the CTP (the KuCoin Platform) were “investment contracts”, a head of the definition of securities, based on the test established in Pacific Coast Coin Exchange[1].

In contrast, in ByBit , the respondent (ByBit) cooperated extensively with OSC Staff throughout the proceedings, made detailed factual admissions as part of the settlement and expressed a willingness to bring its CTP (the ByBit Platform) into compliance with Ontario securities law. Consequently, while Ontarians cannot currently open new accounts on the ByBit Platform and retail investors can no longer access margin or derivative products, ByBit is permitted to continue offering limited services to its existing clients in Ontario and to pursue registration as a dealer with the OSC. This arrangement is detailed in an undertaking made by ByBit as a condition of its settlement agreement with OSC Staff (the ByBit Undertaking).

The ByBit Undertaking is less restrictive than the undertaking given by Binance Holdings Limited and Binance Capital Markets Inc. (together, Binance) in March 2022 (the Binance Undertaking), which effectively prohibits Binance from offering any services in Ontario while “pursuing a regulatory path to ensure compliance with Ontario securities law”.

A more detailed discussion of the key elements of KuCoin and ByBit, and their implications for the evolving regulatory framework for CTPs in Canada, is set out below.


Negative Inferences in an Undefended Hearing

The OSC commenced the KuCoin proceeding in June 2021, two months after Staff of the Canadian Securities Administrators (CSA) published Staff Notice 21-329 (SN 21-329), affirming their position that securities legislation applies to online platforms that provide custodial services for crypto assets traded by their users. KuCoin had notice of the proceedings and an opportunity to participate but declined to do so.

The Panel found that OSC Staff proved that the respondents, two related corporations domiciled in Seychelles and Singapore, allowed Ontario residents to open accounts on the KuCoin Platform and encouraged Ontarians to engage in high-leverage crypto asset trading strategies using margin and futures. Staff’s evidence consisted largely of publicly available, online information such as the KuCoin Platform Terms of Service and Reddit account, as well as the LinkedIn and Twitter profiles of the respondents’ founder, Michael Gan. Staff also led evidence based on an investigator witness who opened an account of the KuCoin Platform, and an investor complaint received by the OSC. KuCoin led no evidence and made no submissions.

Maximum Penalties as Deterrence

Absent any defenses being offered by the respondents, the Panel accepted Staff’s characterization of the respondents as “bad actors” who “put investors at risk”, engaged in serious, aggravated and recurring violations of securities laws and “flouting” securities laws by not recognizing the seriousness of their improprieties. To penalize KuCoin, and as a deterrent for other CTPs, the Panel imposed the maximum penalties possible against KuCoin in the circumstances: a $2 million fine, costs of almost $100,000 and permanent market participation bans.

Broad Application of “Investment Contract” Analysis

Considering the range of highly leveraged margin and derivative products available on the KuCoin Platform, it was easy for OSC Staff to prove that the respondents were dealing in securities in Canada without registration. Staff advanced arguments that trading accounts on the KuCoin Platform could be captured under numerous heads of the definition of “security” in Section 1(1) of the Securities Act (Ontario) (the Act), including: (e) evidence of indebtedness; (b) evidence of title or interest, or (n) investment contracts. It is well-established under Canadian securities law that margin accounts are regulated as securities under the Act, beginning with the precedential case of Pacific Coast Coin Exchange vs. OSC[2](Pacific Coast).

The crypto asset futures available on the KuCoin Platform likely fall under category (p) of the definition of “security”: a commodity futures contract or option that is not traded on a recognized commodity futures exchange. Crypto futures like fall within the definition of “derivative” under the Act, which includes “an option, swap, futures contract, forward contract…” Therefore, the Panel could have concluded that KuCoin was dealing in securities and derivatives in Ontario without considering whether KuCoin offered “Crypto Contracts”, a term developed by CSA Staff in SN 21-329 to describe the relationship between a CTP and its users where clients do not take immediate delivery of the crypto assets purchased by them, and therefore rely on the CTP to satisfy its delivery and custodial obligations.

Since SN 21-329 was published in March 2021, eight Canadian-domiciled CTPs have registered as dealers under securities legislation (Registered CTPs), and have restricted the products available on their platforms to fully-paid crypto assets that are considered appropriate for Canadian retail investors based on criteria developed in collaboratively by CSA Staff and the CTPs in discussions leading up to their registrations. Registered CTPs have accepted that the Crypto Contracts they offer to Canadian investors are considered securities and have obtained exemptive relief from the prospectus requirement to offer such Crypto Contracts to retail investors (the CTP Orders). However, neither SN 21-329 nor the CTP Orders categorize Crypto Contracts as investment contracts or any other specific, enumerated type of security.

Some may find it surprising that the Panel in KuCoin found it necessary to conclude that Crypto Contracts fall within the investment contract category of security, particularly since KuCoin offered margin trading and derivatives, which are regulated under securities laws. Products offered by Registered CTPs differ greatly from those available on the KuCoin Platform, since the terms and conditions of CTP Orders prohibit Registered CTPs from offering margin or derivatives. Nonetheless, the Panel describes “KuCoin’s significant efforts” for the purpose of the Pacific Coast test as “KuCoin’s actions, custody and solvency to manage and deliver on the Crypto Contracts issued to investors”[3].

We expect that Registered CTPs would not consider themselves to be in a “common enterprise” with their clients, whose “expectations of profits” are based primarily on their expectations that market value of crypto assets traded and held on the platform will increase over time.

While the reasons KuCoin may not have the same precedential weight as reasons following a contested hearing where respondents lead evidence and contest OSC Staff’s arguments, we note that an overly broad application of the “investment contract” analysis could have unintended consequences for the emerging securities regulatory framework for CTPs in Canada. A conclusion that crypto futures contracts are investment contracts (and therefore securities) is similarly concerning, since it is arguably more appropriate to regulate futures contracts as derivatives than securities, having regard to the disclosure and trade reporting obligations under both regimes.


Full Disgorgement Notwithstanding Credit for Cooperation

The OSC commenced an enforcement proceeding against ByBit, a Seychelles corporation, in June 2021, the same month as KuCoin. ByBit engaged with the OSC after the enforcement proceeding was commenced and is taking steps to explore the registration and compliance process, most importantly the ByBit Undertaking described below.

In the Settlement Agreement, ByBit admits to engaging in the business of dealing in securities without registration, and engaging in primary distributions of securities without a prospectus, in breach of Ontario securities law. Notwithstanding ByBit’s cooperation with the OSC’s investigation, the Panel requires ByBit to disgorge almost US$2.5 million, representing total revenues earned from Ontario accounts up to the date of the settlement agreement, and to pay administrative costs of $10,000.

ByBit Undertaking

In the ByBit Undertaking, ByBit agrees to stop offering margin, rolling spot and derivative products (Restricted Products) to retail clients in Ontario within 90 days of the Settlement Agreement. During the 90 day wind-down period, ByBit undertakes to verify which of its Ontario clients are “permitted clients” (e.g. institutional investors and high net worth individuals with at least C$5 million in net financial assets) and to require all clients other than permitted clients to close out all positions in Restricted Products.

ByBit also agrees to stop opening new accounts for Ontario residents while its discussions with the OSC are ongoing, and to identify Ontario residents by the address information they provide at the time on onboarding as well as by monitoring IP addresses of potential investors.

ByBit also agrees to a detailed process for a complete wind-down of its Ontario activities in the event that its registration discussions with the OSC fail, as determined by the OSC and communicated to ByBit. After the wind-down is complete, ByBit undertakes to certify compliance with its enhanced controls for restricting Ontario residents from accessing the ByBit Platform for two years following the wind-down.

Finally, ByBit agrees to donate to the University of Waterloo’s Engineering Department all revenues earned from the Ontario accounts from the date of the settlement agreement until the date that ByBit registers under securities laws, or exits Ontario. 

No “Crypto Contract” Analysis

In ByBit, the Panel does not consider which categories of the definition of security or derivative may apply to the Restricted Products offered on the ByBit Platform. The Decision does not mention the “Crypto Contract” concept, and the ByBit Undertaking does not restrict ByBit from providing spot trading and custody services to retail clients in Ontario while registration discussions with the OSC are ongoing.

Future Implications

The KuCoin and ByBit decisions, and the Binance Undertaking, demonstrate that the OSC will enforce securities law against foreign CTPs, including by imposing significant penalties and disgorgement. While the OSC leaves the door open for cooperative CTPs to become regulated as dealers and/or marketplaces, its tolerance for platforms continuing to operate in the province without registration seems to be waning.

In addition, while all CSA members participated in SN 21-329 and the CTP Orders, Ontario is the only jurisdiction to commence enforcement actions against unregistered CTPs such as KuCoin and ByBit. Meanwhile, in the year that has passed since SN 21-329 was published, the number of unregistered CTPs offering services in Canada has proliferated.

Moreover, the types of crypto asset services available to Canadians has diversified beyond the spot, margin and derivative products offered on the KuCoin and ByBit Platforms. Canadian investors can deposit assets to yield-bearing accounts on centralized crypto asset lending platforms, and directly access decentralized finance (DeFi) protocols using software services and non-custodial wallets.

As the number of Registered CTPs increases and their businesses mature, we expect they will continue to work collaboratively with the CSA to expand their scope of permitted activities in a responsible manner. Ideally, Registered CTPs and other stakeholders would have the opportunity to participate in regulatory dialogue through a public comment process to develop a balanced regulatory framework which provides Canadian investors with access to financial innovation, while ensuring investor protection and capital markets integrity.


[1] Pacific Coast Coin Exchange v. Ontario Securities Commission1977 CanLII 37 (SCC), [1978] 2 SCR 112 at p. 128.

[2] Pacific Coast Coin Exchange v. Ontario Securities Commission1977 CanLII 37 (SCC), [1978] 2 SCR 112.

[3] KuCoin, paragraph 47.



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