|
Securities - Derivatives. Lochan v. Binance Holdings Limited
In Lochan v. Binance Holdings Limited (Ont CA, 2025) the Ontario Court of Appeal dismissed a class action appeal, here from "the certification of an action brought on behalf of Canadian investors who purchased cryptocurrency derivative products through an asset trading platform operated by the appellants".
Here the court explains cryptocurrency 'derivatives':[5] A derivative is a financial instrument whose value is derived from or based on an underlying interest or asset (the “Underlying Asset”).[1] The purchaser of a derivative does not necessarily own the Underlying Asset but, rather, is contracting to deal in that Asset for a certain price or value at a later time. In effect, the holder of the derivative is speculating or hedging against the price movement of the Underlying Asset, depending on the nature of the contractual commitment they undertake.
[6] The cryptocurrency derivatives sold through the Binance website (the “Cryptocurrency Derivatives”) were contracts which derived their value based on the price movement of cryptocurrencies. Retail investors could purchase Cryptocurrency Derivatives by registering and opening an account on the Binance website, loading funds or other assets into a digital wallet, and then clicking on the type of Derivative they wished to purchase. Binance operated a retail business in Canada involving three types of Cryptocurrency Derivatives: futures contracts, options contracts, and leveraged tokens. While each of these has distinct characteristics, they are all based on cryptocurrencies as the Underlying Asset.
[7] Binance did not register with the Ontario Securities Commission (“OSC”) to engage in the business of trading in securities, nor did it file or deliver a prospectus to purchasers of Cryptocurrency Derivatives. In April 2021, the OSC notified Binance that it was contemplating enforcement proceedings with respect to Binance‘s failure to register or comply with the applicable prospectus requirements. Various discussions ensued between the OSC and Binance over the next two years, which eventually resulted in the OSC issuing an investigation order and summons to Binance pursuant to ss. 11 and 13 of the OSA in May 2023.
[8] There is ongoing litigation between the OSC and Binance with respect to these matters: see e.g., Binance Holdings Limited v. Ontario Securities Commission, 2024 ONCA 805. In the meantime, in May 2023, Binance announced it would withdraw from operating in Canada and asked users to close any open positions by September 30, 2023.
....
[45] The absence of adequate disclosure appears particularly concerning in relation to Cryptocurrency Derivatives which, as the motion judge observed, have been described by the CMT as “novel and complex products that are inherently risky”: citing Polo Digital Assets, at para. 68 The CMT has also identified “serious investor protection concerns” with offering retail investors cryptocurrency derivatives, arising from “their inherent risks, complexity, the use of margin or leverage and the potential volatility of the underlying assets”: Mek Global, at para. 64. This only highlights the importance of prospectus requirements in relation to Cryptocurrency Derivatives and renders an interpretation of the OSA which would deny Class members a civil remedy for failure to file a prospectus seem out of step with the overall purposes of the statutory scheme.
|
