Bahamas-based FTX closed (spectacularly) last year, taking with it $95 million USD of investment from the Ontario Teachers' Pension Plan (OTPP), and billions of dollars of customer assets. FTX was not registered in Canada, but it was in the process of acquiring Canadian crypto dealer Bitvo, which news reports indicate was held up by pending regulatory approval. It also seems that there are reports that FTX was serving at least some Canadians but that part of their operation was murky. At some point, Ontarians were onboarded and trading on FTX, then later refused (perhaps due to action by the OSC behind the scenes - this is not explained publicly).

The Canadian Regulatory Regime

FTX didn't impact many Canadians (at least as much as they might otherwise would have if they were a big part of the market) due, at least in part, to the new restricted dealer regime and AML rules. Probably Canadian banking was an issue for FTX too (which isn't regulation per se, but in a tightly-controlled banking sector, bank actions can be seen as a sort of extension of government policy). This is a success for the rules in Canada!

I've written many blog posts and given speeches about the reduction in competition due to increased rules in Canada around the dealer space. I'm one of the only lawyers to speak up about these rules, in part because people are who securities lawyers are afraid of offending securities regulators (who they work closely with.) But also because the rules are quite popular among at least some lawyers. The FTX debacle is at least some proof that the system can prevent losses.

Restricted Dealer Safety

The restricted dealer system is obviously safer for customers in the sense that more burdensome rules and checks on dealers can make it less likely that customers lose money when things go wrong. It's hard to see how that can't be the case. But it can be the case that consumer welfare is reduced if there's a lessening of competition and reduced access to services. This is the hidden cost of regulation. No one can observe what could have happened without the restrictive rules. And might customers flock to better run exchanges anyway? The FTX disaster made the news. Companies that demonstrate higher standards and have better partners are likely to attract more business as the space matures.

Those who have followed the FTX story closely might say that the above is nonsense. FTX's failure took many people by surprise. They were a sponsor of stadiums and donated tens of millions to top American politicians. Sequioa Capital, one of its large backers, wrote a glowing article about them. OTPP invested. How could a customer know what all of these professionals didn't? That's the benefit of a regulatory regime, in that it makes it that customers don't need to pay attention. But it's not cost-free.

The costs of regulatory systems can be reduced by following the best principles of other jurisdictions (like Japan, see below) and constantly evaluating what is and isn't working. Unfortunately, the Canadian response has been to simply look to add more rules and reduce the number of companies that are virtual currency dealers. Is this headed in the same direction as the Canadian banking system? That's a model of safety, but also of high cost and extraordinarily high bank profit margins by international standards. There is no free lunch. And the failure of SVB on Friday makes it clear that even the highly regulated banking sector isn't always safe for customers.

Japanese Regulatory System

The Japanese system for cryptocurrency dealers is even more restrictive than the Canadian one. FTX Japan seems to have been one of the few safe units of the FTX group, with a good outcome for customers. Coindesk has more on how the system works in Japan, which is quite similar to the Canadian restricted dealer system.

Going Local

The restricted dealer system seems to have scored a point on the FTX issue. It's also a great example of a lesson: use local companies. Local companies are far easier to reach with the legal system if something goes wrong, and they're more less likely to be frauds than brand new companies abroad (FTX started in 2019). Using a Canadian restricted dealer is an even higher standard than for typical MSB virtual currency dealers, but no matter the means used to buy, customers should be careful about allowing cryptocurrency to stay on any platform, whether located in Toronto or the Bahamas.

Due Diligence

The Ontario Teachers' Pension Plan should have been more mindful about where pensioners' money was going. Investing the money with a new business in Bahamas that isn't covered by Canadian regulations is a warning sign. Even worse, they invested in a round priced at "$420.69" million with 69 investors. Those numbers are not a coincidence. OTPP should never have said yes to the deal on that basis alone, because it's juvenile and shows an obvious lack of interest in professional standards. I'm sure they've updated their internal risk guidelines following their loss. Any investor looking to put money into this space should be sure that they truly understand the regulatory landscape and should take care to scrutinize offshore companies that may not be up to Canadian standards.


Note that the true details about FTX aren't known yet. There are multiple court cases proceeding in several jurisdictions that will help get to the bottom of this story. Although the statements made by the restructuring team that took over don't reflect well on prior management, this is a developing story.