The Ontario Securities Commission has taken its first act of enforcement against a crypto trading platform and issued a precedent-setting crackdown for reprisal against a whistleblower.

The OSC reached a settlement Tuesday with Coinsquare Ltd. as well as its chief executive officer, Cole Diamond; president and founder, Virgile Rostand; and its chief compliance officer, Felix Mazer. 

The regulator found that the firm, at Diamond’s direction, artificially inflated activity on its platform between July 17, 2018 and December 4, 2019 with fake trades representing more than 90 per cent of its reported trading volume.

According to the OSC, Coinsquare made misleading statements to hide the so-called wash trades when members of the public and clients questioned suspicious volumes. Coinsquare also admits it fired an internal whistleblower who repeatedly brought the inflated trade volumes to the attention of senior management.

The OSC investigation shows that several employees raised this subject with upper management but that the “tone from the top undermined the compliance culture.”

Diamond and Rostand are resigning from their positions at Coinsquare as part of the settlement agreement. Diamond must pay $1 million in penalties and Rostand $900,000 in addition to a total of $300,000 toward the cost of the OSC’s investigation. They also both face bans that effectively prohibit them from influencing Coinsquare management for at least three years. 

Mazer has also resigned from his role and is making a voluntary payment of $50,000 to Ontario’s securities regulator. 

“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,” said Jeff Kehoe, director of the OSC’s enforcement branch, in a statement.

Coinsquare and its subsidiary had been trying to register with the OSC and the Investment Industry Regulatory Organization of Canada but must implement sweeping corporate governance changes before continuing the application process. As part of the settlement, they must establish independent boards of directors, appoint new CEOs and CCOs as well as set up an internal whistleblower program.

The Coinsquare settlement comes on the heels of the OSC’s 10-month investigation into the collapse of QuadrigaCX, another Canadian-based crypto exchange. The regulator took the unusual step of releasing its findings on June 11, stating that it was in the public’s interest to reveal the fraudulent activity that had taken place. 

The unexpected death of its founder, Gerald Cotten, and Quadriga’s implosion in 2019 resulted in losses of at least $169 million (US$125 million) for 76,000 investors. The OSC’s findings demonstrated that Quadriga was operating like a Ponzi scheme which could not continue as crypto prices plunged. 

In an interview on BNN Bloomberg on February 7, 2019, Diamond commented on the Quadriga case. “Certainly this is very bad for cryptocurrency in Canada, and we want to do everything we possibly can to solve it,” Diamond said.

He also said that “underlying problems” in the crypto market needed to be fixed including the fact that exchanges are not regulated. “Fix those two problems and we’re ready for the next big wave,” Diamond said.

“Coinsquare recognizes the important role of oversight and regulation in fostering a secure and trustworthy cryptocurrency trading environment in Canada,” a company spokesperson said in a statement emailed to BNNB Bloomberg.

It goes on to say the company’s actions were “guided by legal advice that the trading of crypto assets on the Coinsquare Platform was not subject to Ontario securities law.”

The message says despite the fake volume “there was absolutely no impact on users as the prices paid through our platform always reflected fair market prices.”