Concerned over misleading statements and improper marketing strategies in the cryptocurrency space, two regulatory bodies have issued guidelines to rein in advertising that runs afoul of securities law.
The Canadian Securities Administration (CSA) and Investment Regulatory Organization of Canada (IIROC) said the new guidelines will help crypto trading platforms understand and comply with requirements under securities law and IIROC rules for advertising, marketing and social media use.
“Misleading advertisements and improper marketing strategies may encourage investors to take on risks they would normally avoid.”
“Misleading advertisements and improper marketing strategies may encourage investors to take on risks they would normally avoid, and not respecting the requirements under securities law and IIROC rules may raise concerns about a crypto trading platform’s fitness for registration,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers.
Securities regulators have noticed a recent increase in advertising and marketing by crypto trading platforms. In several cases, CSA and IIROC staff observed statements in crypto trading platforms’ advertising and marketing materials that could mislead investors. Staff are also concerned about crypto trading platforms’ use of gambling-style promotions that may encourage excessive and risky trading by retail investors.
The guidance published September 23 is intended for registered crypto trading platforms, platforms that have or will be applying for registration and other registrants that may be considering establishing a platform as a new business line, the regulators said.
They also warned that CSA members can take enforcement action against crypto trading platforms – including foreign-based ones with Canadian investors – if they don’t comply with securities legislation.
The regulators provided several fictitious examples of misleading language. “The BuyEasy Crypto Exchange is the leading global exchange for trading 16 of the most commonly traded crypto assets,” was one example.
The regulators said the statement is misleading because the terms exchange and marketplace refer to a particular type of regulated entity under Canadian securities legislation and is only applicable if the company is recognized as such.
Another example of misleading language is: “We are your cheapest and best source for Bitcoin.” Regulators flagged that as potentially false or misleading if the crypto trading platform is unable to substantiate the basis for this claim or to demonstrate that it takes reasonable steps to ensure the best price for its clients.
Generally, regulators have been struggling with governing cryptocurrency companies.
In August alone, the Ontario Securities Commission (OSC) flagged four different companies: Aux Caves FinTech Co. Ltd. from the Seychelles; Polo Digital Assets, Ltd. (Poloniex), operating in the Seychelles; Bybit Fintech Limited (Bybit) from the British Virgin Islands; and Mek Global Limited, incorporated in the Republic of Seychelles;, and PhoenixFin Pte. Ltd., incorporated in Singapore, (collectively, KuCoin).
In 2021, the OSC charged Stephan Katmarian, the CEO and COO of Peblik Inc., for violating Ontario’s Securities Act.
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A resident of Mississauga, Ontario, Katmarian heads up Peblik, which, according to its website, is a decentralized, natural resource-based network, powered by the blockchain and a native token. Peblik lists its base as Barbados.
The OSC charged Katmarian with fraud, trading in securities without registration, trading in securities without a prospectus, and making a statement in information submitted to the OSC that was misleading or untrue.
One of the higher-profile cases of a Canadian crypto-asset company running afoul of the authorities occurred in 2020, when the OSC alleged Toronto-based crypto trading platform Coinsquare engaged in market manipulation and misled its clients.
In 2020 as well, the OSC reported that the now-defunct crypto asset trading platform QuadrigaCX collapsed due to fraud committed by its co-founder and CEO, Gerald Cotten.
The report revealed that Cotten opened accounts under aliases and credited himself with false currency and crypto-asset balances, which he traded with unaware Quadriga clients. The OSC classified Cotten’s actions as a Ponzi scheme, which is typically a form of fraud that lures investors and pays profits to earlier investors with funds from the more recent investors.
“Unregistered crypto-asset trading platforms expose Ontario investors to significant risks, including potential loss, theft and misuse of their assets,” Grant Vingoe, chair and CEO at the OSC, said earlier this year. “The recent explosion of unregistered platforms has magnified these risks.”
In March, the CSA issued new guidance for platforms currently trading in security tokens or instruments or contracts involving crypto assets. Part of that framework was the requirement for such firms to register as an investment dealer and become a member of IIROC.
Currently, only two crypto asset dealers are registered with Canadian securities regulators, Wealthsimple, and Coinberry.
The OSC said it will continue to take action against non-compliant crypto-asset trading platforms and are in contact with international securities regulators to exchange information to support enforcement action.