Canada’s watchdogs on high alert over cryptocurrency offerings
Canadian regulators are on high alert over a “mania” surrounding ICOs, technology-based coin or cryptocurrency offerings that are being snapped up by investors around the world to the tune of nearly US$3.8 billion.
“You can see what’s happening in the marketplace — it’s going crazy,” Maureen Jensen, chair of the Ontario Securities Commission, said in an interview.
“We are … quite concerned,” she said, adding that the OSC is consulting on the ICO issues with the Canadian Securities Administrators, an umbrella organization for the country’s provincial and territorial capital markets watchdogs.
“People really should (be careful),” Jensen said. “Don’t jump on the bandwagon — know what you’re buying.”
In an ICO, or initial coin offering, an issuer sells units of a cryptocurrency or digital tokens, which may be used to conduct transactions on a related network.
Their popularity has been driven by the rise of bitcoin, the original cryptocurrency backed by the transactional technology blockchain, which has been compared with significant tech developments such as the internet and World Wide Web.
The price of bitcoin, which first came on the scene in 2009, has soared by more than 2,000 per cent over the past year and was closing in on US$18,000 Friday.
Bitcoin’s success has spurred a flurry of ICO offerings around the world, launching such cryptocurrencies as Ripple, Litecoin and Dash.
Ethereum, a rival blockchain platform whose founding team was largely Canadian, supports its own cryptocurrency called Ether, which clients of the platform use as a form of payment.
Waterloo, Ont.-based online messenger company Kik Interactive Inc. raised more than $100 million from a token offering in September, but Canadians were left out of the action after its backers cited uncertainty over whether securities laws would apply to the offering.
However, Impak Coin raised more than $1 million in Canada the same month, launching via a “regulatory sandbox” set up by Quebec’s Autorité des marchés financiers that exempts the venture from certain regulatory requirements, such as the filing of a prospectus.
In August, the Canadian Securities Administrators (CSA) issued a notice that said many initial coin and token offerings appeared to involve the sale of securities, and should therefore be subject to Canada’s securities laws and scrutiny if they are sold to Canadian investors or by anyone conducting business in Canada.
Regulators justify the scrutiny of ICOs by pointing out that the hype around cryptocurrencies has also attracted scams. This month, the U.S. Securities and Exchange Commission obtained an emergency asset freeze to halt what it called “a fast-moving Initial Coin Offering fraud,” in which up to US$15 million was taken from thousands of investors who were promised a 1,354 per cent profit in less than a month.
The OSC’s Jensen said the underlying technology — blockchain — is “fantastic,” but among the key concerns of regulators is that much of the buying and trading is taking place on unregulated exchanges with few controls and no investor protection.
“Anytime you get such a mania developing around a new product, you’ve got all the great players who were there, who designed the product, who really brought this new asset class forward. But there are a whole bunch of companies that are rebranding themselves as ICOs, when really they’re doing nothing but taking clients’ money.”
Jensen said she is also concerned by a recent development in the United States, where securities exchanges are beginning to trade derivative cryptocurrency products, such as bitcoin futures. While the exchanges are regulated, trading derivatives adds another layer of risk, particularly for retail investors who tend to be less sophisticated than institutional investors.
On Monday, the Canadian Securities Administrators issued a warning to investment dealers and investors about “inherent risks associated with products linked to cryptocurrencies, including futures contracts.”
Louis Morisset, chair of the CSA and the AMF, pointed out that despite being traded on regulated exchanges and cleared by regulated central counter parties, the futures contracts are based on trading occurring on largely unregulated markets for cryptocurrencies.
“Therefore, they may be some circumstances such as price volatility in the underlying markets, which may lead to consequences such as sudden and significant margin calls in the futures market,” he said.
The CSA statement reminded registered dealers and advisers that they must perform their own due diligence on cryp to currency linked products before recommending them to clients.
Jensen and the CSA are not alone in their concern about cryptocurrencies and related products. On Friday, Britain’s Financial Conduct Authority followed up on a September investor alert about ICOs with a pledge to step up scrutiny of the cryptocurrency market to determine whether new investor protection rules are warranted. Investment dealers, investors warned about unregulated exchanges, scams