In the depth of crypto winter, another cryptoexchange has gone belly up. FTX Trading LTD, better known as FTX[1], collapsed on November 8 after a run on deposits stemming from growing murmurs of insolvency. FTX tried to stave off the rapid collapse by reaching an agreement to sell itself to rival cryptoexchange Binance. However, that deal fell through as Binance’s corporate due diligence identified red flags. The future of the beleaguered exchange remains unclear as FTX (along with 130 affiliated companies) filed for bankruptcy on November 11.[2] Several American authorities, including the U.S. DOJ and SEC, are investigating FTX for possible criminal and regulatory charges related to the collapse.[3]
While the scope of investor losses is unknown, it is possible that Ontario retail investors were spared the worst. This is because shortly after the OSC gave crypto-exchanges an ultimatum to register in order to serve Ontario customers (or else), FTX decided to halt Ontario operations[4] rather than seek registration or exemptive relief. This may have limited the exposure of Ontario residents.[5]
Has FTX’s collapse vindicated the OSC’s response to cryptoexchanges?
Recall that in March 2021, the OSC ordered all cryptoexchanges operating in Ontario to either register or wind down their Ontario operations.[5] Since then, several non-cooperative cryptoexchanges have been targeted with enforcement actions while other overseas platforms (including big names like Binance) opted instead to stop offering services in Ontario. There were warnings that the OSC’s tough approach would lead certain platforms to conclude that the costs of compliance was not justified by the size of the Ontario market. There were also gripes about Ontario’s lack of cohesion with other provincial regulators, such as the failure to adopt the Passport System[6].
In the aftermath of FTX’s collapse (with at least $1 billion in client funds missing), it seems unlikely that regulators will adopt laissez-faire approaches. Indeed, in America, the White House has called for stronger cryptocurrency rules. And the OSC’s chief executive Grant Vingoe says the collapse confirmed the need for regulation on a “collaborative basis, globally”.
The OSC’s next target may be cutting off the trickle of Ontario investment on unregulated overseas exchanges. For example, some cryptoexchanges permit easy workarounds to residency prohibitions by allowing the use of VPNs. The OSC has previously warned of the “most serious consequences” for cryptoexchanges encouraging VPN use. Such consequences may materialize sooner rather than later with the memory of FTX’s collapse still fresh in everyone’s mind.
[1] FTX incorporated in Antigua and Barbuda and headquartered in the Bahamas.
[2] In a since-deleted tweet dated November 7, FTX’s (now former) CEO dismissed insolvency rumours as “[a] competitor is trying to go after us with false rumors” and reassured investors that “FTX is fine. Assets are fine”. A few days later, FTX’s (now former) CEO apologized and stated his priority was “doing right by users”. Unfortunately, it was too little too late as FTX filed for bankruptcy shortly after.
[3] At the time of this writing, no criminal or civil charges have been filed.
[4] A pop-up on the FTX website informed Ontario IP addresses that Ontario residents are not eligible for registration. It is not clear if a VPN was sufficient to bypass this restriction.
[5] CSA Staff Notice 21-329 dated March 29, 2021, “Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements”.
[6] The Passport System is an agreement by all provinces and territories (except Ontario) allowing an entity to file a prospectus (or obtain a discretionary exemption) from their home regulator and have their regulatory approval apply automatically in all other jurisdictions.