Binance, Under Investigation In Canada, Files Motion To Dismiss

June 5, 2023
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Lawyers working on behalf of Binance have filed an application urging a Canadian regulator to drop an investigation into alleged compliance breaches by the exchange.

Lawyers working on behalf of Binance have filed an application urging a Canadian regulator to drop an investigation into alleged compliance breaches by the exchange.

In a newly published document filed with Canada’s Capital Markets Tribunal, Binance is seeking to revoke an investigation order, quash a summons and obtain further relief if the tribunal permits.

The investigation order to which Binance refers was filed on May 10 by the Ontario Securities Commission (OSC), and the summons was filed one day later by the same regulator.

Binance’s application to revoke the investigation order was made public this week after it was granted permission by the tribunal to disclose the case publicly.

However, the original investigation order has not been made public, meaning that, at present, the public and the media can only see Binance’s interpretation of it.

According to Binance: “The Investigation Order authorises an extremely broad inquiry into whether Binance may have taken steps to circumvent Ontario securities law and compliance controls or engaged in conduct contrary to Ontario securities law and/or the public interest without any limitation.”

Due to the excessively “broad” nature of the order, and its failure to “particularise” the alleged breaches, Binance argues that the order does not have legal standing and should be revoked.

“The Investigation Order has no legitimate purpose for the due administration of Ontario securities law or the regulation of the capital markets in Ontario,” said Binance, adding that the order was issued “without any actual factual basis”.

Elsewhere, Binance said the investigation order is “an abuse of the Commission’s process” and a “re-litigation” of past engagements between itself and the regulator.

Binance’s past battles with the OSC

As noted in the background to the case, Binance said it has worked closely with the OSC since January 2022, when the OSC indicated that it intended to pursue a cease trade order against Binance.

Only one month earlier, Binance had incorporated a Canadian subsidiary for the first time, but as VIXIO has written in relation to Binance in the US, the Binance platform was already available to Canadians via Binance.com.

In March 2022, Binance came to an agreement with the OSC that would enable Binance to eventually offer its products in Ontario if it fulfilled certain conditions.

This agreement obliged Binance to “admit certain facts” about its past conduct in Ontario and “prevent Ontario users from opening a Binance account” while the agreement was still in force.

In addition, Binance had to identify existing accounts held by Ontario investors and prevent these investors from using any Binance products until the OSC granted permission for it to operate in Ontario.

Binance takes steps to become fully regulated

While Binance was engaged with the OSC, it continued to operate in other Canadian provinces, using the Alberta Securities Commission (ASC) as its “principal regulator”.

In its application to the tribunal, Binance said that, as well as intending to operate in Ontario, it also intended to become a fully regulated digital asset exchange certified by the Canadian Securities Administrators (CSA).

Beginning in May 2022, Binance said it entered “discussions” with the CSA to this effect, and was advised to submit a pre-registration undertaking (PRU). Binance agreed, and began negotiating the terms of the PRU with numerous regulators.

But in November 2022, following the collapse of the FTX exchange, sentiment began to shift among the country’s regulators towards crypto firms.

As Binance describes, the collapse of FTX significantly altered the regulatory outlook of the CSA, and set in motion a move towards tougher rules for crypto firms operating in Canada.

Binance was informed of these developments, and was told that the terms of its PRU may also change.

Binance withdraws from Canada as new rules go live

In February 2023, the CSA issued new rules to all crypto-asset trading platforms entitled "Pre-Registration Undertakings – Changes to Enhance Canadian Investor Protection".

The new rules introduced restrictions on the use of crypto-assets and proprietary tokens, such as Binance’s BNB token, for balance sheet and working capital purposes.

They also prohibited platforms from accepting stablecoin deposits or facilitating trades using stablecoins without prior written consent from the CSA.

Crypto firms that had shown an interest in becoming fully regulated in Canada were then told that they must be prepared to comply with the CSA’s new rule set.

Those that were prepared to comply were asked to submit a revised PRU to both the CSA and their principal regulator.

In March 2023, Binance submitted its revised PRU to its principal regulator, but at the federal level there were still question marks over BUSD, Binance’s proprietary stablecoin.

The next month, Binance was told that BUSD would not be approved by the CSA and would be subject to investment limits in certain provinces, as would BNB.

Binance responded by advising the CSA that such restrictions would be “untenable” for its business in Canada, and on May 9 Binance advised its principal regulator of its plans to withdraw from Canada.

Binance’s principal regulator approved the withdrawal plan and timeframe presented by the crypto firm and agreed for it to publicly announce the plan later that month.

One day later, however, the OSC issued its investigation order and summons to Binance, asking the company to turn over “all communications” related to Ontario and Canada between directors, officers, employees, contractors, agents and consultants.

Binance said that “at no point” in its 12-month engagement with the OSC did the regulator indicate that enforcement action was likely, or that Binance had failed to abide by the terms of its prior agreement with the OSC.

Hence, Binance will argue that the investigation order has “no legitimate purpose”, as it is now leaving Canada and has no plans to operate in Ontario.

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