In a recent pair of decisions, the law around bitcoin, crypto-assets and blockchain-enabled tokens is continuing to evolve:
1. 3iQ and “The Bitcoin Fund”
In 3iQ Corp (Re), 2019 ONSEC 37 (CanLII), the Ontario Securities Commission has ruled in favour of a bitcoin fund manager in an interesting decision that pits the development of a novel asset class (a bitcoin fund) against legal prospectus requirements, the public interest jurisdiction of the Securities Commission, and the purposes and principles of the Securities Act itself.
A fund manager – 3iQ – wanted to launch a so-called “bitcoin fund” to enable members of the public to invest in a managed fund that was dedicated to bitcoin. Initially, the Director denied a receipt for The Bitcoin Fund’s prospectus because of concerns about bitcoin, namely: concerns about the crypto-asset’s liquidity, integrity of the markets for that cryptocoin, and concerns about this fund’s ability to value and safeguard the asset and file audited financial statements.
In a hearing to appeal the initial refusal, the Commissioner issued reasons allowing the prospectus for this fund. Among the issues was the question of whether bitcoin is an “illiquid asset” as defined in NI 81‑102. If so, the proposed fund would not comply with the restriction against holding illiquid assets in section 2.4 of NI 81‑102. While the Commissioner did not go so far as to declare that bitcoin is NOT an illiquid asset, the conclusion was: “Staff has not demonstrated that bitcoin is an illiquid asset,” which arrives at the same point. As for the question of protecting the public interest, the Commissioner turned a bit philosophical about the role of the Securities Commission in acting as guardian of the public.
To take a risky asset like a bitcoin fund and “professionalize” the investment process by pooling investor funds under a professional management structure is a way to mitigate those risks – something that the Commission should encourage, not discourage. “Capital market participants”, quipped the Commissioner, “should be encouraged to engage with the Commission, and not incentivized to avoid doing so.” This is the case especially when it provides an alternative to investors acquiring bitcoin through unregulated vehicles.
… And what do “unregulated vehicles” look like? That bring us to the next case.
2. The “Einstein Exchange” crypto-asset trading platform
On November 1, 2019, the BC Securities Commission was concerned enough about rumours of imminent collapse at a cryptocoin exchange that it applied to court for an order appointing an interim receiver to seize and protect any assets of the so-called “Einstein Exchange”. The exchange was an unauthorized Vancouver-based crypto-asset trading platform. Better known as an “unregulated vehicle”.
Grant Thornton acted as interim receiver and as outlined in its Receiver’s Report, the receiver executed a Friday night search and seizure to sift through the allegations that the Einstein Group owed customers between $8 and $10 million USD. After itemizing the cash, assets, and the state of any cryptocurrency wallets under the control of the “Einstein Exchange”, the receiver determined that the Einstein Group had less than $45,000 in cash and cryptocurrency.
The receiver was quickly discharged and the BCSC investigation continues.
1. 3iQ and “The Bitcoin Fund”
In 3iQ Corp (Re) , […]