Canadian Regulators Warn Against Misleading, ‘Gambling-style’ Crypto Ads

Canadian financial regulators, the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC), have published a joint guidance letter to remind crypto trading platforms about the importance of “requirements relating to advertising, marketing, and social media use.”

In the document published last Thursday, the regulators outlined the three main areas of concern: ads and marketing materials that “could be considered false or misleading,” the use of gambling-style contests, promotions, or schemes, and “compliance and supervisory challenges” of using social media platforms for advertisements.

First and foremost, the notice was addressed to crypto platforms that are either already registered (or filed an application) as a dealer under securities legislation or are considering doing so in the future.

Notably, while these requirements mostly involve trading of digital assets that are considered securities, they can also potentially apply to “crypto assets that are commodities, because the user’s contractual right relating to the crypto asset may itself constitute a security and/or a derivative,” the document stated.

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“We have recently noted some [crypto platforms] using advertising or marketing strategies that include contests, promotions, bonuses and time limits to encourage investors to engage in trading and to act quickly for fear of missing out on an investment opportunity or a reward,” the regulators pointed out.

For example, a “gambling-style” promotion could involve bonus schemes that “may offer a financial reward or a bonus interest in a particular type of crypto asset for the first 500 investors who take an action within the next 24 hours.”

Because of this, crypto platforms should remember that they “have an important role as gatekeepers of the integrity of the capital markets,” according to the regulator.

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The notice added that marketing campaigns that promote this kind of “risky trading” may also be in violation of the platforms’ “obligation to treat clients fairly, honestly and in good faith.”

At the same time, “misleading” advertisements may include statements that suggest that a certain crypto platform is “registered under securities legislation where this is not the case” or that a platform was approved—or even endorsed—by a regulatory authority.

To these ends, the president and CEO of the IIROC, Andrew Kriegler, said his organization “will continue to work closely with the CSA to ensure investors are protected.” 

Taking aim at social media

Finally, the CSA and the IIROC reminded crypto trading platforms that compliance and supervision requirements also include materials posted on social media websites. As such, these firms must keep their social media content up-to-date by designing “systems that allow for compliant record retention.”

“The use of social media sites increases the risk that registered crypto platforms may not be retaining adequate records of their business activities and client communications,” the regulators explained. “Registered [crypto platforms] must design systems that allow for compliant record retention as well as retrieval capability.”

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Ultimately, while social media platforms may be “challenging in terms of supervision,” crypto platforms should strive to adopt “use a risk-based approach to determine whether a crypto platform’s review of electronic communications is sufficient to meet its supervisory obligations.”

“These supervisory obligations are not just restricted to social media use by the [crypto platform] but also by its directors, officers, employees, shareholders, and other third-parties acting on behalf of the [crypto platform],” the letter concluded.

Over the past few months, Canadian regulators have been increasing their efforts aimed at crypto-related firms. In May, for example, the Ontario Securities Commission (OSC) cracked down on exchanges and charged Poloniex with breaking the country’s securities regulations.

In June, the OSC took similar actions against KuCoin.

27 September 2021 12:43

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