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Securities - Securities Act - Procedures. Binance Holdings Limited v. Ontario Securities Commission
In Binance Holdings Limited v. Ontario Securities Commission (Div Court, 2023) the Divisional Court considered a JR against a Capital Markets Tribunal (CMT) decision that it lacked jurisdiction to order the revocation of an "(i)nvestigation Order under s. 144(1) of the Securities Act" (which was initiated "under s. 11(1)(a) of the Securities Act, R.S.O. 1990, c. S.5").
These quotes illustrate OSC regulation procedures in the new 'crypto' field:Brief Background
[4] Binance is a Cayman Islands corporation that operates an online crypto asset trading platform that it describes as the largest in the world. On that platform, users can transfer and store various digital assets. The platform has been accessible in Ontario.
[5] On March 29, 2021, the OSC issued a press release indicating that crypto asset trading platforms doing business in Ontario were required to bring their operations into compliance with Ontario securities law. Those trading platforms, including Binance, were required to contact the OSC to start compliance discussions. Binance did not do so.
[6] By letter dated April 20, 2021, OSC Staff notified Binance that they were contemplating enforcement proceedings against Binance. The letter outlined concerns that Binance was trading in and distributing securities without registering with the OSC and without filing a prospectus or obtaining an exemption, and that Binance was carrying on business as a marketplace without authorization, all contrary to the Securities Act.
[7] Binance began discussions with OSC Staff about regulatory compliance. In June 2021, Binance advised its Ontario users that it could no longer service them and that operations would cease in Ontario as of December 31, 2021. However, on December 29, 2021, Binance communicated to its users that, because of its cooperation with securities regulators, it was permitted to continue operating.
[8] Binance has since acknowledged that the December communication to Ontario users was incorrect. Binance also mistakenly communicated to users and OSC Staff that restrictions were in place for Ontario accounts, when Ontario users were still able to trade on the Binance platform.
[9] On January 7, 2022, OSC Staff notified Binance of their intention to bring an application for a cease trade order.
[10] After further discussions, Binance and its Canadian corporation Binance Canada Capital Markets Inc. entered into the Undertaking and Acknowledgement to the OSC, dated March 16, 2022 (the “Undertaking”). Among other things, Binance acknowledged that it had given Ontario users incorrect information and had permitted Ontario investors to continue to trade after restrictions were supposedly in place to prevent continued trading.
[11] In the Undertaking, Binance undertook to prevent Ontario users from opening accounts on the Binance platform. Binance undertook to identify existing Ontario accounts and prevent all trading in those accounts except for specific steps to, for example, close existing positions or withdraw funds. Binance undertook to wind down its Ontario business in certain products entirely. Binance further undertook to provide quarterly reports to the OSC and retain an independent third party to review Binance’s implementation of its commitments and report to the OSC.
[12] The Undertaking included a reservation of rights. Binance expressly acknowledged that the OSC and OSC Staff retained the right to bring enforcement proceedings or seek temporary orders against Binance, with some exceptions. The scope of this reservation of rights is at issue on this application and is discussed below.
[13] Binance provided quarterly reports to the OSC and retained a third party to fulfill that aspect of the Undertaking. An audit plan for the third party report, acceptable to the OSC, was agreed on. Binance continued to pursue the possibility of doing business in Canada.
[14] A draft third party report was delivered. However, it diverged from the plan, in part because Binance had refused to provide access to its live database. OSC Staff made inquiries. From the standpoint of OSC Staff, Binance was not very responsive and when responses were received they were incomplete. With respect to the live database, after several months Binance said for the first time that it had concerns about an external party having access to its database.
[15] The OSC also became aware that another regulator, the United States’ Commodity Futures Trading Commission, had filed a complaint against Binance and others in the U.S. District Court for the Northern District of Illinois (the “CFTC Complaint”).
[16] The OSC then commenced the investigation into Binance that is challenged in this application for judicial review.
Investigation Order and Summons
[17] By order dated May 10, 2023, the OSC initiated the investigation under s. 11(1)(a) of the Securities Act (the “Investigation Order”). The Investigation Order provided, among other things, that it appeared to the OSC that Binance may have engaged is conduct contrary to Ontario securities law and/or contrary to the public interest, including the following:(i) trading in securities without registration or an exemption from the registration requirements;
(ii) distribution of securities without either complying with or an exemption from the prospectus requirements;
(iii) making misleading statements to the OSC; and,
(iv) taking steps to circumvent Ontario securities law and compliance controls, including in relation to the Undertaking. [18] On May 11, 2023, a summons (the “Summons”) was issued, requiring the production of documents and provision of information about fees and revenue earned in Ontario, Ontario accounts that remained open, and the methodology used to provide that information. The scope of the Summons is at issue on this application.
[19] On May 12, 2023, Binance publicly announced that it would withdraw from operating in Canada.
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