In a recent decision, the Ontario Court of Appeal allowed a class action against one of the world's largest cryptocurrency trading platforms to continue. The decision in Lochan v. Binance Holdings Limited 1 provides insight into how the Ontario courts will consider the certification criteria in securities class actions involving cryptocurrency products and is illustrative of how plaintiffs are applying securities law concepts in the cryptocurrency space.
Background
Binance Holding Limited and its related entities (collectively "Binance") comprise one of the world's largest crypto-asset trading platforms.
Although Binance has not operated in Canada since 2023, a number of Ontario investors purchased certain cryptocurrency derivatives on the platform. A class action was commenced in Ontario by investors who alleged that Binance improperly distributed securities by not filing, or delivering, a prospectus contrary to applicable requirements under to ss. 53(1) and 71(1) of the Ontario Securities Act ("OSA")3, and that Binance failed to disclose the fact that it was illegally trading securities in Canada.
Binance had previously moved to stay the class action on the grounds that its terms and conditions required arbitration.3 The motion and subsequent appeal were dismissed.4
The Court of Appeal's Decision
The Court of Appeal rejected Binance's technical argument that the plaintiff's claim under s. 133 of the OSA did not disclose a reasonable cause of action. Binance argued that the obligation under s. 71(1) to deliver a prospectus only applies in cases where a prospectus has been filed (Binance never filed one).5 The Court interpreted the purpose of the OSA broadly and held that it could not be said that it was plain and obvious that the plaintiff's statutory claim would fail. The Court rejected Binance's argument, based on an older lower court decision in Jones v F.H. Deacon Hodgson Inc., which the Court concluded ought not be followed as it is inconsistent with a broad, purposive interpretation of securities laws.6
Binance further argued that plaintiff's common law claim must fail, as the Class members themselves are caught by the definition of "trade" under s. 1 of the OSA, therefore also engaged in the illegal trading of securities (contravening prospectus requirements themselves) and thus not entitled to common law remedies. The Court found that it was not plain and obvious that the definition expressly or implicitly limited an investor's common law rights.
With respect to the other certification criteria, the Court was satisfied that the plaintiff had met the commonality requirement. The plaintiff met the low burden of showing "some basis in fact" for their proposed common issues by providing documentation showing that contracts for the cryptocurrency derivative products were between Class members and Binance. In particular, the Court concluded that there was a basis to find that Binance was a party to the trades, not only their facilitator, and that purchasers could thus obtain the remedy of recission. The Court found that there was evidence to conclude that Binance was a party to the contracts.
Takeaways
While the certification decision in Lochan does not decide the case on the merits, the case demonstrates the evolving scope of potential liability for crypto-trading platforms and other cryptocurrency industry participants under Ontario securities laws. The regulation of cryptocurrency is evolving, and Ontario courts have so far typically been deferential to Canadian securities regulators' very broad readings of securities law and regulation to apply to a wide variety of cryptocurrency products – an approach which is now somewhat out of step with a recently more crypto-friendly approach to regulation in the United States.
While this was only a preliminary decision where the argument that securities laws applied was not particularly difficult on the low standard applicable on the motion, it remains to be seen whether plaintiffs in other cases will be able to push the boundaries and prosecute novel cases involving the application of securities laws to cryptocurrency investment products.
Footnotes
2. Securities Act, RSO 1990, c S.5.
5. S. 71(1) reads:
Obligation to deliver prospectus
71 (1) A dealer not acting as agent of the purchaser who receives an order or subscription for a security offered in a distribution to which subsection 53 (1) or section 62 is applicable shall, unless the dealer has previously done so, send by prepaid mail or deliver to the purchaser the latest prospectus and any amendment to the prospectus filed either before entering into an agreement of purchase and sale resulting from the order or subscription or not later than midnight on the second day, exclusive of Saturdays, Sundays and holidays, after entering into such agreement.
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