Ontario Court of Appeal allows crypto class action

Binance Holdings Limited, a Caymen Islands corporation with related entities, operated as a cryptocurrency exchange in Canada. Until Sept. 30, 2023, Binance allowed Canadians to register an account to purchase three kinds of cryptocurrency derivative contracts: futures contracts, option contracts and leveraged tokens.

Binance did not register with the Ontario Securities Commission (OSC) to engage in securities trading, nor did it file prospectuses for the derivatives. As a result, the OSC sued Binance. The company announced it would withdraw from the Canadian market in May 2023.

After the OSC sued Binance, a class action on behalf of investors who suffered losses trading the derivatives followed. The class alleged that the investments were highly volatile and leveraged up to 125 times.

An investor with $1,000 could use that as collateral to open a position on Binance of $125,000 — setting themselves up for potentially catastrophic losses. Because there was no prospectus delivered, the class alleged they were not informed of the risks involved in such trades and sought damages for their losses, or to have the court unwind the transactions.

A prospectus was required

The class claimed that Binance sold the derivatives on its own account as a principal to the class. The Capital Markets Tribunal had previously found that cryptocurrency derivatives are investment contracts, and therefore securities. As a result, those engaged in trading cryptocurrency future contracts must be registered and comply with prospectus requirements (unless an exemption was secured). The class argued that it is now settled law that a prospectus was required to distribute the derivatives.

Binance argued, unsuccessfully, that there was no prospectus for the derivatives and that the section of the Securities Act the class relied on required a principal to “deliver to the purchaser the latest prospectus and any amendment to the prospectus filed … before entering into an agreement of purchase and sale.” Since there was no prospectus, there was no violation of the relevant section of the Securities Act and there could be no claim by the class.

The Court of Appeal found this did not preclude the class action from moving forward and noted that while Binance may succeed at trial, there was no good reason to doubt the correctness of some of the law it relied upon. It appeared on its face to be inconsistent with the investor protection goals of the Securities Act.

The court’s reasons are noteworthy and likely apply to other kinds of transactions involving crypto assets. This decision emphasizes the importance of carefully considering whether any arrangement involving crypto assets amounts to a distribution, and whether the terms under which such an arrangement is reached would amount to a distribution of crypto-based securities, derivative or otherwise.

The investing public is increasingly interested in crypto assets, and advisors are finding themselves faced with requests for advice about them more and more often. The Court of Appeal’s decision underscores the importance of due diligence when advising clients about the purchase or sale of crypto assets and related derivatives, as well as the possibility for registrants to inadvertently engage in unauthorized distributions and expose themselves to civil and regulatory liability as a result.