Ontario Superior Court affirms decision to investigate foreign crypto asset trading giant

The Ontario Superior Court of Justice upheld the Ontario Securities Commission's (OSC) decision to investigate the crypto asset trading business Binance Holdings Limited.

Binance Holdings Limited is a corporation based in the Cayman Islands, operating an online crypto asset trading platform that it claims is the world's largest. The platform allows users to transfer and store various digital assets. It has been accessible in Ontario.

In 2021, the OSC announced that crypto asset trading platforms doing business in Ontario must bring their operations into compliance with Ontario securities law. Binance failed to contact the OSC to start compliance discussions.

The OSC informed Binance that it was contemplating enforcement proceedings against it. The OSC raised concerns that Binance was trading in and distributing securities without registering with the OSC, without filing a prospectus or obtaining an exemption, and that Binance was carrying on business as a marketplace without authorization, contrary to the Securities Act.

Undertaking and acknowledgement

After discussions between Binance and the OSC, Binance and its Canadian corporation entered into an undertaking and acknowledgement to the OSC. Binance acknowledged that it had given Ontario users incorrect information and permitted Ontario investors to continue to trade after restrictions were supposedly in place to prevent continued trading.

In the undertaking, Binance undertook to prevent Onario users from opening an account on the Binance platform. The undertaking also included a reservation of rights. Binance expressly acknowledged that the OSC and its staff retained the right to bring enforcement proceedings or seek temporary orders against Binance, with some exceptions.

In May, the OSC initiated an investigation into Binance. The investigation orders provided that it appeared to the OSC that Binance may have engaged in conduct contrary to Ontario securities law and to the public interest. The OSC issued a summons, requiring Binance to produce its documents and provide information about fees and revenues earned in Ontario, accounts that remained open, and the methodology used to provide that information. Binance then publicly announced that it would withdraw from operating in Canada.

Binance brought the case to the Ontario Superior Court of Justice, arguing that the undertaking foreclosed the OSC's investigation order and summons. Binance also claimed that, in any event, the summons was overbroad and unenforceable.

Undertaking did not foreclose an investigation

Binance described the undertaking as a settlement and argued that, due to its terms, the OSC could not pursue the investigation. Consequently, Binance claimed that the investigation order was an abuse of process and was precluded by estoppel.

The court noted that the undertaking contained an express reservation of rights, in which the OSC and its staff expressly retained the right to bring enforcement proceedings or seek temporary orders for any past, present, or future conduct contrary to the law or the public interest.

The reservation has an exception, precluding enforcement proceedings or temporary orders "arising from the facts set out …in the 'Facts' section" of the Undertaking so long as Binance "remains in compliance with the Undertaking and has not made any misrepresentations to Staff in respect of the Undertaking."

Binance argued that the investigation order did not arise from the facts set out in the "Facts" section of the undertaking. However, upon reading the entirety of the undertaking, the court found that it did not preclude the investigation order. The statements of fact in the investigation order go well beyond and include those serious factual statements in the undertaking, giving rise to the investigation.

The exception also does not apply where Binance has misrepresented matters concerning the undertaking. The investigation order includes an allegation that Binance has made misleading statements to the OSC.

The court concluded that the undertaking contained an express, broad reservation of rights under which the OSC retained the right to bring enforcement proceedings. The exception to that reservation did not apply here. Binance had not shown that the undertaking precluded the investigation order or was an abuse of process. Accordingly, the court declined to quash the investigation order.