The Ontario Securities Commission (OSC) has alleged that Toronto-based crypto trading platform Coinsquare manipulated the market, contrary to the Ontario Securities Act, through the reporting of inflated trade volume numbers.
In a Statement of Allegations from the OSC dated July 16, the commission stated it is bringing a proceeding against Coinsquare and company executives, including co-founders Cole Diamond (CEO) and Virgile Rostand (president), as well as Felix Mazer, who was Coinsquare’s chief compliance officer (CCO) until his resignation in June 2020.
The OSC has listed three allegations against Coinsquare and the above-named executives:
- Engaging in market manipulation through the reporting of inflated trading volumes;
- Misleading clients about trading volumes, which Diamond and Rostand allegedly “authorized, permitted or acquiesced” and;
- Taking reprisal against an internal whistleblower, which Diamond allegedly “authorized, permitted or acquiesced.”
According to the OSC, Coinsquare inflated its trading volumes by reporting fake or “wash” trades, which represented more than 90 percent of its reported trading volume between July 2018 and December 2019. The OSC alleges that decision came directly from Diamond. “At Diamond’s direction, Rostand, Coinsquare’s founder and president, wrote the algorithm to inflate Coinsquare’s trading volume,” the OSC stated.
The securities regulator stated that it is bringing the allegations against Coinsquare in order “to hold them accountable for their misconduct and to send a message to other market participants in the crypto asset sector that deceptive conduct will not be tolerated in Ontario’s capital markets.”
According to the OSC, Coinsquare inflated trading volumes by reporting fake or “wash” trades, which represented more than 90 percent of its trading volume between July 2018 and December 2019.
A statement provided to BetaKit by the company notes that “Coinsquare has been working closely with the OSC to reach a settlement and secure a path forward for the company as we continue to go through the process to obtain registration and marketplace status as an Alternative Trading System.”
The statement also notes that the company takes “full responsibility” and will “fully cooperate with the OSC on all regulatory matters.” A hearing is set to be held on July 21.
The proceedings from the OSC follow reporting from Vice in June alleging Coinsquare “artificially inflat[ed] how much currency it is trading.” According to Vice, leaked company emails showed that Coinsquare was “wash trading,” a term used for automatically buying and selling currency between accounts it controlled. It was predicted that the accusations were likely to draw the attention of security regulators.
Coinsquare, which launched its trading platform in 2014, facilitates the buying and selling of cryptocurrency assets, including Bitcoin, Litecoin, and Ether. According to the OSC filing, it had approximately 235,000 client accounts as of December 2019.
The wash trading reportedly commenced shortly after Coinsquare proactively reached out to the OSC in March 2018, with a request for support from the OSC LaunchPad program, which offers informal guidance and the ability to “discuss potential next steps for registration and/or exemptive relief, if required.” Approximately 840,000 wash trades occurred on the Coinsquare platform, with an aggregate value of approximately 590,000 Bitcoins.
“These wash trades had no economic substance and involved no change in beneficial or legal ownership over any assets,” the OSC said. “No funds or financial interests were actually exchanged in these transactions.” While no funds were actually exchanged, the wash trading served to affect Coinsquare’s standing on crypto asset trading platforms, which report trading volumes and rank international crypto-asset trading platforms based on their reported trading volumes.
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The regulator also alleges that Coinsquare continued with the practice despite employees raising concerns. Due to this, the OSC alleges that the crypto trading startup misled clients and the public who raised concerns over the inflation, while also concealing it from its own staff.
“Almost immediately after Coinsquare commenced reporting the inflated trading volumes, clients and members of the public started to identify the suspicious activity and raise questions about it,” the OSC wrote. “In response to these questions, Coinsquare made misleading statements.”
The filings from the OSC also allege that Coinsquare took “reprisal” against an employee whistleblower for repeatedly raising concerns. That employee was fired.
The filings from the OSC also allege that Coinsquare took “reprisal” against an employee whistleblower for “repeatedly raising concerns internally about Coinsquare inflating its reported trading volumes” to the company’s senior management. According to the OSC filings, that employee was fired in early December after repeated attempts to have the wash trading practice corrected.
The OSC also alleges that despite questions from OSC staff in 2018 regarding “market integrity,” Coinsquare failed to provide “complete responses” and rather than self-reporting its wash trading, asserted that it was taking steps to prevent market manipulation. Subsequent to Coinsquare’s registration submissions as an investment dealer and an alternative trading system in early 2019, the OSC stated that it went to the company’s Toronto office for an unannounced on-site inspection in December of that year. The OSC filings allege that the following day Coinsquare “turned off” its wash trading and stopped reporting the inflated trading volumes.
In addition to the alleged wash trading, the OSC also claims that Coinsquare “failed to implement appropriate controls to prevent other inappropriate trading practices.” The regulator stated that a market marker function added to Coinsquare’s platform early-on in its operations led to doubling of actual buy and sell orders made by users, resulting in “additional non-economic, internal trades valued at approximately 112,000 bitcoins.” Another feature, which OSC called a market bot function, also caused discrepancies.
The OSC specifically notes in its filing that Mazer failed to fulfill the duties of his “critical” role as CCO.
The allegations and investigation from the OSC follow recent revelations that personal data of thousands of Coinsquare users had been breached last year. In June, Coinsquare stated that the number of Coinsquare users affected at the time was limited to four and it was not aware of the full extent of the breach. However, in a subsequent conversation with Diamond, the CEO told BetaKit Coinsquare had indications over a year ago that thousands of its customer’s personal data had been breached. Coinsquare reportedly notified law enforcement and the Office of the Privacy Commissioner of Canada of the breach both in 2019 and again this year when Vice revealed that it was larger than originally stated.
Coinsquare’s full statement to BetaKit reads as follows below:
“Coinsquare has been working closely with the OSC to reach a settlement and secure a path forward for the company as we continue to go through the process to obtain registration and marketplace status as an Alternative Trading System.
Despite there being the appearance of more volume, there was absolutely no impact on users and the prices paid through our platform always reflected fair market prices.
We take full responsibility and are determined to fully cooperate with the OSC on all regulatory matters.
Coinsquare has always put clients, employees and shareholders first and we will continue to do so as we work to pave the way for the industry.”
Correction (07/17/20): an earlier version of this story stated that the OSC had alleged that investors in Coinsquare had been misled, rather than investors through the company’s platform. BetaKit regrets the error.