When Quadriga founder Gerald Cotten died in December 2018, over 76,000 investors lost a combined $169 million, money that couldn’t be recovered from the unregulated Vancouver-based cryptocurrency platform largely as a result of what an Ontario Securities Commission investigation found was fraudulent trading.

Since Cotten’s death, the price of Bitcoin has shot up more than 1,500 per cent, breaking the US$60,000 mark for the first time earlier this month. The increase in price—and the increase in interest from both institutional and retail investors that’s come with it—has led to a surge of new businesses that allow Canadians to buy and sell cryptocurrencies.

Those businesses—and the lack of enforcement and oversight of them—could be putting investors at risk. An analysis by The Logic found there are now more than 600 companies that offer cryptocurrency trading services in Canada but that have not registered with the country’s securities regulators, with no evidence any of them have faced any penalties from Canadian authorities.

Just four years ago, Canadians interested in buying and selling Bitcoin, Ethereum and other cryptocurrencies had limited options, with only Quadriga and a handful of Bitcoin ATMs accepting Canadian dollars. 

The Financial Transactions and Reports Analysis Centre of Canada’s registry of money service businesses now lists 634 companies that are actively registered as “dealing in virtual currencies.” Only one of them—Wealthsimple—has registered with securities regulators or sought exemption from their requirements. 

The vast majority of those 634 companies are Canadian, with 52 headquartered in foreign countries including the U.K., U.S., Hong Kong and elsewhere. They include major Canadian players like Coinsquare, as well as tiny operators with very little in the way of a web presence.

The Logic has identified an additional 11 cryptocurrency-trading platforms that accept Canadian dollars or market their services to Canadians that have neither registered with FINTRAC nor registered as securities dealers, including Blockchain.com’s popular wallet and trading service and Binance, the world’s biggest digital-currency exchange.

The only crypto-asset trading platform that has registered for relief from regulatory requirements through the Canadian Securities Administrators is Toronto-based online investment service Wealthsimple. Chief executive Michael Katchen said the proliferation of unregistered crypto exchanges is concerning for investors, and cited Quadriga as an example of the worst-case scenario of what can happen in the absence of robust regulation and enforcement.

“We know we have had crypto disasters in the not-too-distant past in Canada, with Quadriga. The scale of this industry is bigger by many multiples, if not orders of magnitude, today,” said Katchen. “I think many Canadians assume this industry is regulated given the response to Quadriga and public messaging, and that’s concerning. Most of these platforms do not have to meet the standards of a registered dealer, bank or trust company.”

See the full list of 634 virtual-currency dealers in Canada

Even before the recent Bitcoin boom enticed new businesses to enter the lucrative market en masse, regulators around the world were struggling to keep up with the industry, which trades in a product that’s explicitly designed to resist government control.

Bitcoin was created to let individuals conduct financial transactions without the need for governments, central banks or financial institutions acting as middlemen. However, almost everyone gets paid in currencies issued by central banks, which means people need exchanges to convert their money into Bitcoin and other cryptocurrencies.

Cryptocurrency wallets use a password, known as a private key, that gives the owner access to the digital assets held inside, which become unretrievable if that password is forgotten, or lost. Many cryptocurrency investors outsource the responsibility of holding their coins and keeping their private keys secure to exchanges, whose wallets hold about 2.4 million bitcoins—or, at US$60,000 per bitcoin, US$144 billion—out of the 18.7 million that have been mined.

Both FINTRAC and provincial securities regulators asserted jurisdiction over the industry in 2020.

In January 2020, the CSA issued a staff notice asserting that provincial securities regulators had jurisdiction over virtual-currency dealers that hold coins in custody for their customers. The notice states that while the most popular cryptocurrencies are not themselves securities, the contracts many trading platforms enter into with customers are.

According to the CSA’s guidance, platforms that do not make “immediate delivery” of cryptocurrencies, but rather hold them until customers want to sell them or transfer them to their own digital wallets, are entering into a derivative contract that is subject to securities regulation. While some exchanges immediately deliver cryptocurrencies to an external wallet controlled by the client, most don’t.

The model most major exchanges employ would appear to be covered by the CSA’s definition of securities dealing. Some of the virtual-currency dealers registered with FINTRAC, such as Bitcoin ATMs, may qualify as making “immediate delivery” of cryptocurrencies and fall outside what the CSA consider their jurisdiction.

In an email, CSA spokesperson Ilana Kelemen declined a request for an interview, saying the organization “plans to publish a notice shortly on steps that platforms need to take to comply with securities legislation.” Spokespeople for the Ontario Securities Commission and the B.C. Securities Commission also declined requests for interviews with their chairs, saying the CSA were best positioned to comment on pan-Canadian matters. 

The CSA staff notice is not a new law or regulation, but rather the regulators’ interpretation of the existing law—an interpretation with which many in the industry disagree. If provincial securities regulators start cracking down on cryptocurrency exchanges based on this interpretation, a targeted company could challenge it in court—which could set a precedent that the activity in question doesn’t constitute securities dealing after all.

Matthew Burgoyne, head of the cryptocurrency and blockchain group at McLeod Law in Calgary, said his advice to companies in the industry would be to try to stay on the right side of the guidance, since such a legal challenge would be expensive and time-consuming. “I wouldn’t want to be the platform that is the test case,” he said.

But complying with the guidance is expensive, too, and carries restrictions that put companies at a disadvantage against competitors that don’t have to follow them. Wealthsimple Crypto customers can only invest in two cryptocurrencies (Bitcoin and Ether), have a $30,000 annual trading limit, and can’t transfer the coins to their own digital wallets or use them to make purchases.

Katchen said those restrictions mean investors who want to invest larger amounts, buy different cryptocurrencies, or take control of their coins are forced to do business with competitors that aren’t subject to the same oversight.

“Anyone who has done that research and made that choice, their only option is to invest with an unregulated platform,” Katchen said. “We don’t think that’s in their best interest.”

In June 2020, digital-currency firms came under the jurisdiction of another type of regulator, when the federal government recognized them as money-services businesses under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. FINTRAC requires all companies that direct their services at Canadians, regardless of where they’re headquartered, to register as money-service businesses and comply with requirements meant to ensure they’re not being used for illegal purposes.

FINTRAC hasn’t necessarily licensed or endorsed the hundreds of businesses that have registered as virtual-currency dealers—a registration simply means the business has met the legal requirements to do so.

A spokesperson for FINTRAC declined a request for an interview with the agency’s chair and would not disclose whether it was aware of the 11 businesses The Logic identified as operating without registration in Canada.

The 11 platforms The Logic identified as offering their services to Canadians without either FINTRAC or securities regulator registrations are all foreign businesses. Only two of those 11 platforms—Shapeshift and Paxful—responded to requests for comment, saying they believe they are compliant with Canadian law, despite their lack of registrations.

Binance’s competitors have long bemoaned what they see as its lack of regulatory adherence. Though chief executive Changpeng Zhao rejected claims the Malta-based company isn’t wholly compliant with regulations everywhere it does business, it is currently under investigation by the U.S. Commodity Futures Trading Commission.

Jonathan Ip, a lawyer who advises blockchain and cryptocurrency companies, said FINTRAC’s definition of “directing services at Canadians” is open to interpretation and may mean something more active than simply accepting Canadian residents and Canadian dollars: “If they’re not trying to solicit business here, they’re probably taking a view that they don’t need to be registered.”

With two separate regulatory regimes, different rules for foreign and domestic players, and a lack of clarity around how the courts might eventually view these new rules and guidelines, the Canadian cryptocurrency industry faces a lot of uncertainty. Addison Cameron-Huff, a Toronto-based lawyer who represents clients in the cryptocurrency industry, said he wasn’t convinced that increased scrutiny from securities regulators would make investors any safer.

Cameron-Huff pointed out Bernie Madoff, former chair of the Nasdaq, orchestrated the largest Ponzi scheme in history while operating under the oversight of securities regulators.

“Being within this system doesn’t make you immune to Ponzi schemes,” he said. “What we definitely do need is better financial policing in Canada around scams. Trying to bring things under a complex regime that wasn’t meant for that, will people end up being safer? No.”

Wealthsimple’s Katchen said the decisions regulators make now will determine whether Canadian cryptocurrency businesses become leaders or get left behind.

“This is an industry that holds huge promise, and Canada has an opportunity to be successful here,” Katchen said. “We have a lot to gain by doing this right, and a lot to lose by letting the opportunity pass us by.”

With files from Allan Tong