We have previously written about the cryptocurrency asset trading platform Binance, which is the subject of an Ontario Securities Commission investigation. A certification motion was recently brought against the Binance group of companies on behalf of purchasers of “cryptocurrency derivative products.” In Lochan v. Binance Holdings Limited, the Superior Court of Justice approved class action certification under section 5 of the Class Proceedings Act.
The defendants named in the action included Binance Holdings Limited (“Binance”), a Cayman Islands company, and its Canadian subsidiaries. As the Court explained, Binance is self-described as “the world’s largest crypto asset trading platform.” It marketed and sold “cryptocurrency derivative contracts over its website to Canadian retail investors directly or through its Canadian subsidiaries.” The plaintiffs in the proposed class action had purchased cryptocurrency derivative products from the defendants. The action was primarily based on section 133 of the Securities Act, which provides a right of action where a “dealer or offeror” fails to comply with certain legislation requirements.
Binance Sold Cryptocurrency Derivatives Contracts
The Court reviewed how Binance carried on business, noting that the first step for users was to access the Binance website and create an account, which required the user to agree to the Terms of Use. Purchasers paid for their cryptocurrency derivatives “by loading funds or other assets into a digital wallet on the website.” As the Court explained, “Binance carried on a retail sale business with respect to three types of cryptocurrency derivatives contracts in Canada: futures contracts, options contracts, and leveraged tokens,” all of which were based on cryptocurrency “as the underlying asset.” Users had to click on the type of contract they wanted to buy. The Court stated that, as far as could be told “from the documentation of transactions in the record,” users purchased from, and sellers sold to, the defendants themselves.
Investigation Concerns Whether Binance Breached Securities Laws
In April of 2021, the Ontario Securities Commission informed Binance that it was considering enforcement proceedings in relation to the defendants’ “trading in and distributing securities without registering with the OSC and without filing a prospectus or obtaining an exemption.” It further informed Binance that it was “carrying on business as a marketplace without authorization.” After various interactions between Binance and the OSC, the OSC issued an Investigation Order based on concerns that Binance may have breached Ontario securities laws. These possible breaches included engaging in securities trading without registration or exemption, distributing securities without complying with prospectus obligations (or holding an exemption) and making misleading statements.
In May 2023, Binance “publicly announced that it would withdraw from operating in Canada.”
Applicants Must Meet the Requirements of Section 5 of the Class Proceedings Act
In considering whether to certify the action under the Class Proceedings Act, the Court began by noting the requirements of section 5. That section states that a court shall certify when (a) the pleadings disclose a cause of action, (b) there is an identifiable class that the representative plaintiff would represent, (c) the claims of the class members raise common issues, (d) a class proceeding would be the preferable procedure for the resolution of those issues, and (e) certain requirements are met by the representative plaintiff.
The Court noted that the certification process focuses on “the form of the action, and not on its substance” and that there must be “’some basis in fact’ for each stage of the certification analysis.” As the Court observed, the standard applied in the motion is “much less stringent” than a balance of probabilities.
Court Finds the Causes of Action Contained in the Pleadings Fall Within the Provisions of the Securities Act
As to whether the pleadings disclosed a cause of action, the Court indicated that the test was whether or not it was “plain and obvious” that the pleadings did not disclose “a reasonable cause of action.” Among other things, the Court referenced prior findings that a cryptocurrency derivatives contract had been held to constitute a “security” and “investment contract” under the Securities Act and that the “marketing and sale” of such contracts by a cryptocurrency exchange had been held to be a “distribution” under that statute. The plaintiffs’ claim alleged breaches of sections 53(1) (requiring the filing of a prospectus) and 71(1) (requiring a dealer to deliver to a purchaser a prospectus) of the Securities Act (and similar provisions elsewhere in Canada). The Court concluded that if such breaches were proven, the plaintiffs would be entitled to a remedy under section 133 and at common law. Since the causes of action were “squarely within the statutory terms,” this element of section 5 of the Class Proceedings Act was satisfied.
The Court also found that the second element was met. Specifically, the plaintiffs proposed a class definition that included all those who had purchased cryptocurrency derivative contracts from Binance from September 13, 2019, to the date of certification, with some exceptions. The Court noted that this definition was relatively broad and narrow enough and, if necessary, the class period could be narrowed in the future as evidence dictates.
Court Rejects Defendants’ Arguments on Common Issues Requirement
Most of the Court’s analysis focused on the various common issues sought to be certified by the plaintiffs. It began by confirming that some evidence was necessary to establish that each of those common issues is not “bereft of factual support.” Of the eight common issues raised, half concerned liability pursuant to the Securities Act or common law, and the Court had no qualms in confirming that such issues were common to the class as a whole. There was also sufficient evidence before it confirming that one or more defendants had sold cryptocurrency derivatives contracts to Canadians “over its website starting in 2019.”
The other half of the common issues raised related to the remedies sought by the plaintiffs, including rescission and damages. The defendants argued that rescission was not an available remedy since it was impossible and, as such, that particular remedy could not serve as a “common issue” for the purpose of the certification motion. Legally, rescission means placing the parties to a contract “in the position they were in prior to contracting.” The defendants argued that “since cryptocurrency derivative trading takes place on the Binance website between buyers and sellers other than Binance itself,” such a remedy was impossible.
The defendants argued that giving effect to rescission would require each party that benefitted from a particular transaction to return its profits “to the party that suffered a loss in the transaction.” They argued that this was not only unworkable but it would also create a “conflict of interest between class members.”
The Court rejected this argument. It was noted that the evidentiary record did not support the notion of contracts existing between users of the Binance website, and it was conceded on cross-examination that Binance users did not, in fact, “contract directly with each other.” The Court found no factual basis for the defendants’ position “that rescission would mean an unwieldy unwinding of user-to-user contracts and a conflict of interest among class members that makes the question unanswerable on a class-wide basis.”
The Court also noted that the determination of whether class members were entitled to rescission was to be left for another day. For certification, the sole question was whether “the remedial approach – whatever it turns out to be, for any one class member will be the remedial approach for all class members.” The Court observed that the record supported the conclusion that “the class members’ contracts are all the same.”
Lastly, the Court confirmed that a class proceeding would be the preferable procedure for resolving the common issues and that the representative plaintiffs could be expected “to fairly and adequately represent the interests of the class.” The motion was thus granted, and the action was certified.
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