ICOs: innovation and potential fraud - interview with Annie Leblanc, AMF

Could you please share more details with our readers about Autorité des Marchés Financiers, with a focus on payments regulation and fraud prevention? What does your current role within the Securities Fraud department involve?

The Autorité des marchés financiers (the “AMF” or the “Authority”) is the body mandated by the Québec government to regulate Québec’s financial markets and assist consumers of financial products and services. The AMF is unique in that it oversees, in an integrated manner, the areas of insurance, securities, derivatives, deposit institutions—other than banks—and the distribution of financial products and services.

One of the AMF’s mission is to protect consumers against unethical, abusive or fraudulent practices, to better foster the confidence of the public and of the business community.

The AMF’s Enforcement Branch is a team of over 180 members tasked with preventing and detecting violations of the laws administered by the AMF, investigating such violations and ensuring the application of penalties. We also work with various partners in Québec, across Canada and around the world, including Canadian and foreign securities regulators, police forces, government agencies and ministries. I am a part of this team. I am a member of the Quebec Bar (since 1999) and have been working as an Investigator for over 15 years.

The AMF is part of the umbrella organization of Canada’s provincial and territorial Securities regulators, The Canadian Securities Administrators (CSA), whose objective is to improve, coordinate and harmonize regulation of the Canadian Capital markets. I am a member of the CSA Investments Fraud Task Force, a special enforcement unit focusing on detection, disruption and a commitment to protecting Canadian investors of new types of frauds.

The AMF is also a founding member of the International Organization of Securities Commissions (IOSCO). IOSCO’s membership regulates more than 95% of the worlds securities markets in 115 jurisdictions. IOSCO collaborates closely with the G20 and the FSB on international regulatory reforms.

How is the use of cryptocurrencies and tokens perceived in Canada? Can you briefly present the authority’s view on ICOs?

Cryptocurrencies are not considered legal tender in Canada. The Canada Revenue Agency (CRA) has characterized cryptocurrency as a commodity. Digital currencies are subject to the Income Tax Act. The law treats persons and entities engaged in the business of dealing in Virtual Currencies as money service businesses. Cryptocurrency trade in Canada will soon be in compliance with anti-terrorist financing (ATF) and anti-money laundering (AML) regulations, however those amendments have not yet been declared in force.

Depending on the facts and circumstances of each specific case, a cryptoasset may be considered as a security and/or the underlying interest of a derivative and hence fall under the jurisdiction of Securities Laws.

The variation in classifications is also a product of the versatility of cryptocurrencies. Some holders may therefore use them as a means of payment, others may treat them as a speculative financial instrument or as property, while the future could bring yet even more functions.

Regulators (in Canada) welcome digital innovation and recognize that new fintech businesses may not fit neatly into the existing securities law framework. The CSA Regulatory Sandbox is an initiative of the CSA to support fintech businesses seeking to offer innovative products, services and applications in Canada. It allows firms to register and/or obtain exemptive relief form securities law requirements, under a faster and more flexible process than through a standard application, in order to test their products, services and applications throughout the Canadian market, generally on a time-limited basis.

One good example is digital asset funds, “index” funds and managed account services which pool various digital assets or which engage in active trading to optimize returns (e.g. First Block Capital, Rivemont Crypto Fund). These products are offered to accredited investors.

But the surge in cryptocurrencies also drew our attention as some individuals are taking advantage of the digital currency craze to pursue illegal activities and defraud investors. The AMF has therefore stepped up its preventive measures to caution the public about the dangers associated with cryptocurrencies and put an end to the illegal schemes whenever we can do so, trying to intervene quickly, to protect the public.

Are there any famous scam stories around ICOs? How can users spot a fraudulent ICO, and are there any signs that trigger the fact that the investment is a scam?

In many ways, an ICO can be very similar to an initial public offering (IPO). The coins/tokens can be similar to traditional shares of a company because their value may increase or decrease depending on how successfully the business executes its business plan using the capital raised.

A study revealed that more than 80 percent of initial coin offerings (ICOs) conducted in 2017 were identified as scams (Issued by the ICO advisory firm Statis Group).

The AMF is committed to fighting this growing problem and has taken measures to protect consumers and prevent illegal cryptocurrency offerings. In 2018, in addition to raising public awareness of ICOs, the AMF took stepped to prohibit PlexCoin, PlexCorps and their promoters from soliciting investors in Québec. The Quebec Financial Markets Administrative Tribunal issued a series of expansive ex parte orders prohibiting Dominic Lacroix and several of his companies from promoting and soliciting investors for a new virtual currency set to be launched. PlexCoin described itself as the “next decentralized worldwide cryptocurrency.” It boasted that its “new revolutionary operating structure” would make transactions faster, easier and safer than any other cryptocurrency.

Dominic Lacroix and his life and business partner Sabrina Paradis-Royer are under investigation by the AMF and US authorities over their PlexCoin ICO which allegedly took millions of dollars CAD from Canadian, US and worldwide investors in 2017.

Many intermediaries were involved in the moving of money and/or cryptocurrency in this case and many orders to freeze assets included payment processors used by Plexcoin. The freezing or seizure of traditional assets is something both familiar to courts and easier for them to manage.

Digital assets are proving more of a challenge. In this specific case, Lacroix was ordered to make the transfer of 420 Bitcoins, worth around CAD 3.7 million dollars, immediately in front of the judiciary. He was warned that if he did not make the transfer he would be found in contempt of court and jailed. Lacroix finally made the transfer, a first for Canadian courts in dealing with a digital currency case. The case is ongoing.

When wondering if you are dealing with a fraud, watch out for these red flags: unsolicited offers; guaranteed high investment returns; sounds too good to be true; pressure to buy right now; a lack of current, accurate or adequate information about the company and team behind/ anonymity; vague or using undefined technical or legal jargon (quick search of parts of the text= copy of other sites); claims that the ICO is “regulator- compliant” without explaining how the offering is in compliance with securities law.

Your best bet - if you are involved with these types of businesses - is: regular due diligence and looking out for “black lists” and press releases. Quick searches on the internet can give you plenty of public information and you would be surprised to see how easy it becomes to spot the fake ones. Even just paying attention to the pictures used on their website can help you detect a fraudulent ICO project.

Can you name some initiatives driven by the financial authorities globally that aim to keep this space protected?

Regulatory Sandbox /accelerator/ innovation initiatives allowing firms to trial new products or services and eventually, the granting of exemptions, are just a few. A wider, global sandbox, initiative is led by Global Finance Innovation Network (GFIN), who aims to: act as a network of regulators to collaborate, share experience and best practices and communicate to firms; provide a forum for joint policy work and provide firms with an environment in which to trial cross-border solutions.

Recently Abu Dhabi Global Market (ADGM) has launched a framework designed to address the full range of risks associated with crypto asset activities, including risks relating to money laundering and financial crime, consumer protection, technology governance, custody and exchange operations.

July 4, 2018 marks a historical day for Malta, as the Maltese Parliament has officially passed 3 bills into law, establishing the first regulatory framework for blockchain, cryptocurrency and DLT (Distributed Ledger Technology). This makes Malta the first country in the world to provide an official set of regulations for operators in the blockchain, cryptocurrency and DLT space. Malta’s revolutionary cryptocurrency and blockchain technology regulatory provisions came into effect November 1st, 2018.

And just recently (January 2019), the European Securities and Markets Authority (ESMA) published its Advice to the European Union (EU) Institutions- Commission, Council and Parliament- on initial coin offerings and crypto-assets. The Advice clarifies the existing EU rules applicable to crypto-assets that qualify as financial instruments, and provides ESMA’s position on any gaps and issues in the current EU financial regulatory framework for consideration by EU policymakers.

How do you see the crypto market evolving in 2019, from both a business and regulation perspective?

This new technology has broken with all the “old-world” paradigms, forcing us to view our institutions from a completely different perspective.

The fast-paced growth of financial technologies and artificial intelligence poses new challenges to regulators with respect to prevention and detection. More than ever, enforcement agencies must collaborate to implement a regulatory framework that is robust and internationally consistent.

As more companies discover uses for crypto and blockchain, and more users accept them as a way to simplify their lives, they will remain a central point of conversation in technology. More interestingly, as it better demonstrates its value in a variety of situations, the technology will further ingrain itself.

I believe we can no longer ignore this space.

About Annie Leblanc

Annie started her professional career as a defence attorney/partner at a renowned criminal law firm in Montreal. Thereafter, she moved on to the financial sector. She’s been a Senior Investigator involved in complex high profile cases related to various securities laws and regulations.

Annie’s been a guest speaker at several conferences on topics relating to internet fraud. She is also an active member of the AMF Fintech working group, the CSA Investment Fraud Task Force and a member of the IOSCO C4 Enforcement sub-working group.

Annie is an Associate member of the ACFE. She has been a member of the Quebec Bar Association since 1999.