Snubbing regulator costs crypto firms millions

In one decision, the tribunal ordered a $2 million penalty, market bans, and almost $100,000 in costs against Seychelles-based Mek Global Ltd. and Singapore-based Phoenixfin Pte. Ltd. — which didn’t participate in the hearing — after finding that they violated securities laws by operating the KuCoin platform, and trading crypto contracts and futures, without registration. The tribunal found that KuCoin issued securities without a prospectus or an exemption.

In its ruling, the panel found that crypto contracts and crypto futures meet the definition of securities as they are “investment contracts”.

“I conclude that all the elements of the test of whether a product is an investment contract have been met. The investors paid money into the enterprise, expected a profit and were completely dependent on KuCoin for the success of the enterprise,” the panel said in its decision, adding there are also serious investor protection concerns associated with dealing in these products.

“These include their inherent risks, complexity, the use of margin or leverage, and the potential volatility of the underlying assets,” it said.

Separately, a panel also approved a proposed settlement with Seychelles-based Bybit Fintech Ltd., which admitted to the same violations — trading without registration and distributing securities without a prospectus or exemption.

In settling the case, ByBit agreed to disgorge the US$2.5 million in revenues that it has generated in Ontario while operating illegally since 2018. It also agreed to pay $10,000 in costs, and to bring its business into compliance with Ontario securities law, or wind it down.

In the meantime, an undertaking with the regulator requires Bybit to donate any ongoing revenues generated from its accounts in Ontario to the University of Waterloo’s engineering department.

The panel noted that, unlike the operators of the KuCoin platform, after the OSC launched its enforcement action ByBit took steps to resolve the case and cooperated with the regulator.

In doing so, ByBit ends up paying more in disgorgement than the penalty levied against the un-cooperative KuCoin operators — although ByBit isn’t banned from the market.

The decision in the KuCoin case noted that disgorgement wasn’t possible, since the firms’ lack of cooperation prevented regulators from determining how much revenue the companies have generated from their non-compliant activity.

“The administrative penalty sought will prevent KuCoin from reaping a windfall, considering that there is no offsetting disgorgement order,” the panel said in its decision, which concluded that a $2 million penalty is appropriate to act as a deterrent for the KuCoin companies and as a general deterrent to other players in the crypto industry that ignore securities law requirements.

The OSC has a couple of other outstanding enforcement actions under way against crypto trading platforms that are also accused of violating securities law and failing to heed the regulator’s call to get registered.

“Foreign crypto asset trading platforms that want to operate in Ontario must play by the rules or face enforcement action,” said Jeff Kehoe, director of enforcement at the OSC, in a statement.

“The outcomes announced today should serve as a clear indication that we refuse to tolerate non-compliance with Ontario securities law,” he added.

The OSC said that it will continue to take action against crypto trading platforms that aren’t complying with securities law, and that it’s working with other international securities regulators to share information that may inform future enforcement actions.

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