CEO of Coinsquare, Cole Diamond, in his Toronto office, on July 7, 2018.Christopher Katsarov/Globe and Mail
Ontario’s securities watchdog has reached a settlement with Coinsquare Ltd. and three of its officers over allegations that the Toronto-based cryptocurrency trading platform significantly inflated its trading volumes and terminated a whistle-blower who raised concerns about the practice.
The terms of the settlement are confidential until a hearing that is scheduled to be held by videoconference on July 21.
In a statement of allegations, the Ontario Securities Commission says that Coinsquare chief executive Cole Diamond directed company founder Virgile Rostand, who at the time served as its chief technology officer, to develop an algorithm that would inflate the platform’s trading volumes. (The third officer involved in the settlement is Felix Mazer, who was the Coinsquare’s chief compliance officer from May, 2018, to June of this year.)
The algorithm, which the company called the Market Volume Function, created simultaneous, matching buy and sell orders from an internal company account – a form of market manipulation known as wash trading, according to the OSC.
Approximately 840,000 wash trades occurred on the Coinsquare platform between July 17, 2018, and Dec. 4, 2019, representing more than 90 per cent of the company’s trading volume, according to the statement of allegations. The company allegedly hid these activities from OSC staff while it was in discussions with the regulator about registering its subsidiary Coinsquare Capital Markets Ltd. as an alternative trading system.
Coinsquare said in a statement that it has been working closely with the OSC to reach a settlement and that it is continuing to go through the process of registering as a marketplace.
“Despite there being the appearance of more volume, there was absolutely no impact on users, and the prices paid through our platform always reflected fair market prices,” the company statement reads.
“We take full responsibility and are determined to fully co-operate with the OSC on all regulatory matters.”
The settlement comes after the securities watchdog issued its findings into operations at another Canadian cryptocurrency exchange, the now-defunct QuadrigaCX. In a report published last month, the OSC said that Quadriga’s late founder and sole director Gerald Cotten operated the company as a Ponzi scheme and engaged in fraudulent trades that led to substantial losses for its users.
In a move widely viewed as a regulatory response to Quadriga’s collapse, which left users collectively owed an estimated $215-million after Mr. Cotten died in India on his honeymoon, Canada’s securities regulators announced earlier this year that many cryptocurrency exchanges will likely be subject to the country’s provincial securities laws.
Coinsquare employees started raising concerns with senior management about the inflated trading volumes in March, 2019, according to the statement of allegations issued Friday. Some of these employees were concerned about how the conduct could affect their professional designations, the statement reads.
After learning that the OSC was planning to conduct an on-site review as part of Coinsquare’s registration process, one internal whistle-blower allegedly raised his concerns about the artificial trading volumes with Mr. Rostand, who deactivated the algorithm.
“However, within days, Rostand reversed course after Diamond learned it had been disabled and directed that Rostand turn it back on,” the statement of allegations reads.
The whistle-blower, whose identity the OSC did not divulge in the statement, continued to escalate his concerns but was told the matter was not up for discussion, according to the OSC. In October, 2019, he informed the company that he was taking stress leave.
Coinsquare formally terminated the whistle-blower’s employment on Dec. 3, 2019, in what the OSC alleges was a “prohibited reprisal.” Ontario securities law protects whistle-blowers from being terminated, demoted or facing other kinds of discipline.
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