Case Summary: Lochan v. Binance Holdings Limited, 2024 ONSC 2302

On April 19, 2024, Justice Morgan released his decision in Lochan v. Binance Holdings Limited, 2024 ONSC 2302, certifying a national class in the first Canadian class action against a cryptocurrency platform for the illegal trading and distribution of securities.

Sections 5(1)(a) and (c) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 (“CPA”) were the two most contentious sections of the certification analysis and the Defendants largely focused their argument on the unavailability and unworkability of the remedy of rescission on a class-wide basis. Justice Morgan declined to determine the availability of rescission, leaving this to the common issues judge. He did find that if rescission is available, it could be determined on a class-wide basis.

Justice Morgan noted that the cryptocurrency market had a large number of retail investors which raised access to justice concerns supporting the preferability of a class action under s. 5(1)(d) of the CPA.

The requirements under sections 5(1)(b) and (e) of the CPA were not seriously contested and were easily satisfied.

Background

Binance marketed and sold cryptocurrency derivative contracts to Canadian retail investors. Binance sold three types of derivative contracts: futures contracts, option contracts, and leveraged tokens, all of which had cryptocurrency as the underlying asset. Cryptocurrency derivative products have been found to be investment contracts and their marketing and sale have been found to constitute distributions under s. 1(1) of the Ontario Securities Act, R.S.O. 1990, c. S.5 (“OSA”).[1]

To lawfully distribute securities under Ontario and equivalent provincial securities legislation, a company is required to register with the provincial securities commission and file a prospectus or obtain an exemption to these requirements. Section 71(1) of the OSA and equivalent provisions require that any dealer or agent who receives an order or subscription for a security offered in a distribution deliver a prospectus to the purchaser. Binance acted in the capacity of a principal in their sale of the cryptocurrency derivative contracts to class members. This placed them within the definition of a securities dealer under s. 1(1.2) of the OSA. Binance did not register with the Ontario Securities Commission (“OSC”) or file a prospectus, nor did it obtain an exemption for these requirements, which placed them in contravention of ss. 53(1) and 71(1) of the OSA.

OSC Enforcement Proceedings

Prior to the commencement of this class action, the OSC warned Binance about their improper conduct. On March 29, 2021, the OSC issued a press release warning crypto asset trading platforms carrying on business in Ontario that they were required to bring their operations into compliance with Ontario securities law and start discussions about compliance with the OSC. Binance did not contact the OSC. For over two years, Binance was involved in various compliance discussions and proceedings with the OSC before publicly announcing on May 12, 2023, that it would withdraw from operating in Canada.[2]

The Binance platform is now illegal in Canada and is the subject of an ongoing OSC investigation.

The Mechanics or Availability of a Remedy Should Not be Decided at Section 5(1)(a)

The Plaintiffs advanced both a statutory and a common law cause of action. They plead that the illegal sale of the cryptocurrency derivative contracts breached ss. 53(1) and 71(1) of the OSA and equivalent provisions in other provincial securities legislation as well as rendered the contracts void under the common law. Both causes of action entitle the Plaintiffs to damages and/or rescission under s. 133 of the OSA and at common law.

The Defendants argued that s. 5(1)(a) was not met because rescission may be an unavailable or unworkable remedy. They state that rescission implicates the rights of all parties to a contract, which in this case would include multiple Binance users who could be class members or non-Canadian Binance users. Justice Morgan rejected this argument, stating that the mechanics of a remedy and whether it can be implemented on a class-wide basis are not s. 5(1)(a) issues. The availability of rescission as a remedy can be considered only after a cause of action has been established.

Rescission and Aggregate Damages Could be Determined in Common

The Plaintiffs sought to certify eight common issues, four pertaining to liability and four pertaining to remedies.

Justice Morgan had “little hesitation” certifying the liability common issues based on the clear evidence before him that Binance did sell cryptocurrency derivative contracts to Canadian users and the Divisional Court’s finding that Binance never filed a prospectus.[3]

For the common issues pertaining to remedies, rescission was once again largely the focus. The Defendants argued that the remedy of rescission was unworkable and would cause conflicts among the class members. Their position was that Binance was simply the trading platform and did not have a substantive interest in trades between users. They stated that users contract with each other to make trades and Binance is only a medium for the contracts.

Justice Morgan rejected this argument as Binance did not produce any evidence at certification to support their assertion that class members contracted with each other. In fact, Binance’s Core Operations Manager conceded that Binance users do not contract directly with each other.

It is worth noting that the relevant common issue did not ask whether the class members were entitled to rescission; rather it asked: “[i]f the Class members are entitled to rescission or damages against the Defendants, or any of them, then in what amount?” Justice Morgan reiterated that the actual availability of the remedy is something that must be determined at the common issues trial. He concluded that the record supported that the remedial approach, whatever it may be, could be determined in common and certified common issue 5.

The Defendants also argued that common issue 6, which related to whether damages could be assessed in the aggregate, should not be certified due to a lack of a proper methodology for assessing damages. The Defendants challenged the Plaintiffs’ expert methodology on the basis that it did not account for gains that may have been made by class members on their cryptocurrency derivative investments. Justice Morgan rejected this, stating that there is no reason why the same methodology that accounts for losses cannot account for gains. Binance also acknowledged that it maintained detailed account information for all their users and transactions, which further supported that aggregate losses would be calculable.

All eight of the common issues were certified.

Access to Justice Concerns Support a Class Action as the Preferable Procedure

In determining that a class action was the preferable procedure, Justice Morgan noted the importance of access to justice in light of the fact that the OSC has reported that more than half of Canadian crypto asset owners are retail investors with less than $5,000 in the market. He also mentioned Binance’s previous motion to stay the action based on an arbitration clause in their user contract that required users to arbitrate claims in Hong Kong. This arbitration clause was found to be unconscionable and did not constitute a valid alternative procedure. 

Concluding Remarks

In recent years, the OSC has been working hard to crack down on non-compliance of cryptocurrency platforms operating in Ontario. Cryptocurrency derivative contracts have been described by the Capital Markets Tribunal as novel and complex products that are inherently risky to retail investors.[4] Justice Morgan’s certification decision is an important recognition by the Court of the importance of the OSA objectives of protecting investors from harm and upholding the integrity of our capital markets.

Given the volatile nature of derivative contracts, if rescission is found to be available, class members could be entitled to large amounts of damages. It remains to be seen whether and how the certification of the Binance class action will have an impact on the cryptocurrency industry and future cryptocurrency class actions.

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