Ontario Securities Commission Settles with Coinsquare Executives Regarding Inflated Trading Volumes: 90% of the reported trading volume had no economic substance

The Ontario Securities Commission (OSC) has approved a settlement agreement with Coinsquare Ltd., a top crypto exchange based in Canada. According to the OSC, Coinsquare executives  Cole Diamond, Virgile Rostand and Felix Mazer have settled allegations of market manipulation on the Coinsquare platform that mislead investors and while garnering a reprisal against an internal whistleblower that revealed the ploy.

In settling this matter, Coinsquare admits that it engaged in market manipulation by reporting inflated trading volumes. Between July 17, 2018, and December 4, 2019, Coinsquare reported approximately 840,000 wash trades amounting to an estimated 590,000  Bitcoins and representing over 90 percent of the reported trading volume on its platform. The OSC states that these trades “had no economic substance.”

Coinsquare also admits it took a reprisal against an internal whistleblower who reported concerns about the inflated trading volumes to the company’s senior management.

Diamond and Rostand also admit that they engaged in conduct that facilitated one or more of breaches of Ontario securities law. Mazer admits to failing to fulfil his role as the CCO of Coinsquare contrary to the public interest.

Wash trading, or manipulation of crypto trading, is a recognized problem in the crypto exchange industry. Typically, instigators will take both sides of a trade in a move to inflate overall trading volume making the exchange appear larger than it truly is. Many sites track exchange volume and rankings based on exchange liquidity are highly coveted.

In March 2019, Bitwise Asset Management reported that around 95% of the cryptocurrency market trading volumes reported via CoinMarketCap may have been due to wash trading. In September 2019, the Blockchain Transparency Institute revealed that as much as 50% of reported Bitcoin trading might be fake volume.

As part of the OSC settlement, Diamond and Rostand have apparently agreed to resign from their positions at Coinsquare and paid administrative penalties of $1 million and $900,000, respectively.

Diamond and Rostand are also being banned from acting as registrants and directors or officers of a registrant for three years and are banned from acting as directors or officers of other market participants for three and two years, respectively.

These bans, together with other conditions, prohibit Diamond and Rostand from influencing the management of the Coinsquare platform for at least three years.

As well, Mazer will be subject to a one-year ban from acting as a director or officer of a registrant, or from holding a position that requires registration. The settlement also reflects that Mazer resigned from his role as Coinsquare’s Chief Compliance Officer (CCO), and that he made a voluntary payment of $50,000 to the Commission.

Coinsquare, Diamond, and Rostand will also pay a total of $300,000 toward the costs of OSC Staff’s investigation.

Coinsquare and its subsidiary that are apparently seeking registration with the OSC (Coinsquare Capital Markets Ltd.) are being required to implement substantial corporate governance improvements. The OSC states that these include the establishment of independent boards of directors, appointing new CEOs and CCOs, creating an internal whistleblower program and implementing policies and procedures to monitor and assess compliance with Ontario securities law.

Jeff Kehoe, Director of the Enforcement Branch at the OSC, stated:

“Despite several employees raising concerns about inflated trading volumes, Coinsquare not only stuck with the practice, but lied to investors about it and retaliated against a whistleblower. Being an innovator in our capital markets is not a free pass to disregard Ontario securities law. All market participants – including those in novel industries – must act honestly and responsibly. This settlement holds the Respondents accountable for their misconduct and requires Coinsquare to implement significant changes to improve their corporate governance. This case is also an important milestone, as it is the first action we have taken for a reprisal against a whistleblower since important protections for employee whistleblowers were added to Ontario securities legislation in 2016.”

Once corporate governance changes are made, the OSC states that Coinsquare Capital Markets must resubmit complete and updated applications for registration to the OSC and to the Investment Industry Regulatory Organization of Canada (IIROC). This process may permit OSC and IIROC Staff to assess the applications in light of all available information and then make a final determination on whether to grant or refuse registration.

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