Key Points
- Canadian crypto exchange ezBtc misappropriated approximately $9.5 million (13 million CAD) worth of customer Bitcoin and Ether, with most funds diverted to online gambling sites.
- EzBtc founder David Smillie was found to have deceived customers by falsely claiming assets were held securely in cold storage while transferring them to personal accounts and gambling websites.
A Crypto Exchange Under Scrutiny
The British Columbia Securities Commission (BCSC) has released findings from its investigation into ezBtc, a now-defunct Canadian cryptocurrency exchange, and its founder, David Smillie. The case highlights significant mismanagement of customer funds and alleged fraud, raising concerns about the oversight of crypto trading platforms.
Between 2016 and 2019, ezBtc operated as a cryptocurrency trading platform, attracting investors with promises of security and attractive returns. During this period, the exchange accumulated over 2,300 Bitcoin and 600 Ether from customers. EzBtc’s website advertised a “unique savings program” offering 9% annual returns. It claimed that over 99% of user funds were protected in cold storage, an offline method considered highly secure for cryptocurrency assets.
Misrepresentation of Asset Storage
The BCSC’s investigation revealed a significant discrepancy between ezBtc’s claims and actual practices. According to the commission’s findings, Smillie diverted 935.46 Bitcoin and 159 Ether—approximately one-third of user funds—to personal exchange accounts and online gambling sites, including CloudBet and FortuneJack.
“We find that in the aggregate, 935.46 Bitcoin and 159 Ether were transferred by ezBtc to Smillie’s exchange accounts and/or to CloudBet and FortuneJack,” the BCSC panel stated. “The transfers to the two gambling websites were sometimes direct from ezBtc, and sometimes indirect from ezBtc to Smillie’s exchange accounts and then to the gambling websites.”
Blockchain analysis conducted during the investigation showed that ezBtc never held more than 11 Bitcoin and 20 Ether in its wallets at any given time, contradicting the exchange’s claims of secure cold storage for customer assets.
Impact on Investors
The collapse of ezBtc has resulted in significant losses for many of its customers. One investor, JJ, in the BCSC report, testified to losing 484 Bitcoin. At the time of the loss, this amounted to approximately $823,000. Given the current value of Bitcoin, that same amount would now be worth around $48 million.
Smillie assured JJ, stating, “I’ve taken extra precautions to segregate and cold store your coin.” The BCSC found this statement to be false. Investors reported experiencing financial hardship, stress, and a loss of trust in cryptocurrency platforms due to their experiences with ezBtc.
Regulatory Findings and Next Steps
The BCSC panel concluded that ezBtc and Smillie violated securities laws by perpetrating fraud related to securities. The commission determined that Smillie had direct knowledge of the deception and diversion of customer funds, dismissing his attempts to attribute responsibility to other executives.
“It is not credible that he was unaware of those ezBtc transfers to the gambling site addresses that also received crypto assets from Smillie’s Exchange Accounts,” the panel stated, emphasizing the interconnected nature of the fraudulent transfers.
The BCSC is now in the process of determining appropriate sanctions against Smillie and ezBtc. These sanctions may include monetary penalties and prohibitions on future market participation. A final decision regarding sanctions is expected by September 24, 2024.
Implications for the Crypto Industry
The ezBtc case underscores the potential risks associated with centralized cryptocurrency exchanges and highlights the industry’s need for enhanced regulatory oversight. As the cryptocurrency market continues to evolve, this case serves as a reminder of the importance of due diligence and the crypto community’s often-repeated advice: “Not your keys, not your coins.”
The outcome of this case may have broader implications for regulating cryptocurrency exchanges in Canada and potentially influence approaches to oversight in other jurisdictions. For the victims of ezBtc, the regulatory proceedings represent a step toward potential resolution, though the recovery of lost funds remains uncertain.
As the BCSC moves forward with its deliberations on sanctions, the crypto community and regulators will watch closely, seeking lessons to prevent similar incidents in the future and strengthen the integrity of cryptocurrency trading platforms.
