Canada:

Crypto-Platforms Hit With Eleven Coordinated Class Actions


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Crypto-currency trading platforms
(“Crypto-Platforms“) received an
unwelcome surprise last month, when
eleven of them were hit with coordinated class action suits
in
America by two law firms. The class actions target some of the
largest crypto-currency exchanges in the world: Binance, Bibox and
KuCoin, along with several individual defendants.

Crypto-Platforms are online trading platforms that generally
allow investors to (1) purchase and sell Bitcoin and other
crypto-currency using fiat currency; (2) store their
crypto-currency in online “Digital wallets”; and (3)
participate in initial coin offerings
(“ICOs“) investing in the development of
new tokens. 

The American class actions were filed on April 6, 2020 in
federal court in the Southern District of New York, a popular venue
for complex financial litigation. The proposed class is
investors who purchased digital tokens on ICOs hosted on the
defendants’ online exchanges and lost much of their holdings
when the tokens crashed.

The complaint against Binance, one of the targets,
alleges that the Crypto-Platform based in Malta improperly hosted
the sale of twelve digital tokens on its platform in return for
listing fees (as well as a percentage of each trade). These
digital tokens were sold in ICOs, which operate similar to IPOs as
they can be used to raise capital from investors. The
complaint alleges that “Binance and the Issuers entered
into contracts to list these Tokens for sale on the Binance
exchange in violation of federal and state law. As a result,
Binance and the Issuers reaped billions of dollars in
profits
.” While these digital tokens were classified as
“utility tokens” (generally not considered securities in
America), it was alleged that they were in substance
“securities” because they were investments in speculative
projects. Therefore, the issuers were subject to federal
securities laws and should have filed registration statements with
the SEC and Binance was required to register with the SEC as an
exchange or broker-dealer. 

But Binance did not register as an exchange, nor did the token
issuers provide adequate disclosures. All investors got were
“whitepapers”, informal disclosure documents with some
information about their investments, but lacking the details of
formal SEC securities disclosures. For example, the complaint
alleges that the whitepapers lacked critical information about the
significant risks inherent in the digital tokens, which led class
members to make foolhardy investments. As a result,
Binance participated in illegal solicitations and sales
of securities for which no registration statement was in effect,
and as to which no exemption from registration was
available
.” Rights of action include federal claims
of unregistered offer and sale of securities, unregistered broker
and dealer violations as well as state “blue sky”
laws

The Binance case and its brethren are uncertified, so it remains
to be seen how they fare. But the American legal landscape is
often the canary in the coalmine, and similar cases could arise in
Canada. The Canadian Securities Administrators
(“CSA“) warned in one of their staff notices
that “Securities laws in Canada will apply if the person or
company selling the securities is conducting business from within
Canada or if there are Canadian investors.”

To date, no cryptocurrency trading platform has been recognized
as an exchange in any jurisdiction in Canada. However, several
Crypto-Platforms actively solicit Canadian investors.

But Crypto-Platforms with Canadian customers should be
cautious. As Siskinds discussed in an earlier post, the
CSA places substance over form when deciding if a Crypto-Platform
is subject to Canadian securities laws. In its January 16, 2020 guidance, the CSA indicated
that Crypto-Platforms that act like exchanges will be treated as
such (and subject to applicable regulations). Under the
CSA’s purposive approach, a Crypto-Platform that does not
immediately deliver crypto-assets to customers as a typical
commercial practice is likely subject to Canadian securities
regulations. Crypto-Platforms which host ICOs that sell tokens
whose value is tied to the future profits or success of a business
would also be subject to Canadian securities regulations. 

Unfortunately, just because an entity calls itself an exchange,
doesn’t mean that it is complying with securities laws
applicable to exchanges. This is the alleged core of the
American crypto-exchange class actions against Binance and
others: Entities that should have followed the rules,
didn’t, and investors lost big. The American experience
should be a warning light for Canadian investors on
Crypto-Platforms: Approach with caution.

Investors should consult with experienced securities lawyers to
learn more about the risks and remedies associated with
Crypto-Platforms.

Originally published 06 May 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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