A B.C. Securities Commission panel has issued an $18.4-million penalty against a person who used his cryptocurrency trading platform to defraud investors.
David Smillie and his numbered company 1081627 B.C. Ltd. — operating as ezBtc — were ordered by the commission on Nov. 27 to repay $10.4 million of ill-gotten gains and an $8-million administrative fine.
Smillie was found to have taken upwards of $13 million worth of assets from his clients to use for personal expenses or to gamble online.
Investors also lost out on what, so far, in retrospect, was a significant missed opportunity with the rise of bitcoin’s value.
Smillie was the directing mind of ezBtc, which was incorporated in 2016.
Smillie first solicited people to deposit their bitcoin and ether cryptocurrency in his accounts (or crypto “wallets”), via the ezBtc website, in order to further trade the assets.
Smillie offered what he described as a “unique savings program that allows customers to safely earn a 9% commission annually with daily payments,” although ezBtc charged fees for deposits, withdrawals and trades, according to the panel’s liability findings on Aug. 7.
Between 2016 and 2019, customers deposited over 2,300 bitcoins and over 600 ethers into their ezBtc addresses on the platform.
An investigation order was issued in 2019, following complaints to the commission.
One ezBtc customer lost 484 bitcoins in 2019
Four ezBtc customers who had been defrauded testified at a commission hearing last April.
For example, a customer identified as “JJ” asked for a $73,000 withdrawal but was initially denied, in April 2017.
When JJ tried to transfer his remaining bitcoin, Smillie told him that the ezBtc’s website had been hacked and that approximately 484 of JJ’s bitcoin had been stolen.
Smillie eventually wrote JJ a cheque for $73,000 in person, in Vancouver, in May 2021. However, JJ never recovered the 484 bitcoins.
Smilie “made excuses about non-payments and threatened customers who complained publicly,” the panel stated.
Smillie ended up depositing much of the cryptocurrency into his personal accounts and online gambling sites. The daily balance of ezBtc’s bitcoin and ethereum wallets never exceeded 11 bitcoins and 20 ethers, respectively, the commission found.
Smillie and ezBtc “fraudulently diverted their customers’ crypto assets for their own purposes,” the panel concluded.
“Their deceit was blatant and repeated,” the panel stated, adding that “Smillie blatantly and repeatedly lied to customers as he authorized, permitted or acquiesced in the transfers of bitcoin and ether to his personal accounts and online gambling sites.
“It is obvious that Smillie ought to have known that transferring customers’ assets to his personal accounts and to online gambling sites, instead of keeping them at ezBtc in cold storage, could result in the loss of those assets and put the customers’ pecuniary interest at risk.”
The panel issued its penalty based on the value of the unrecovered cryptocurrency in July 2019.
The commission calculated 935 bitcoins and 159 ethers were then worth about $13 million although by last April it was worth about $94 million. (Since November, bitcoin has risen in value about 30 per cent compared to April.)
Smillie did not attend the hearings in person or by videoconference, but he was represented by legal counsel Cody Reedman.
“We have no evidence of Smillie’s personal circumstances or his ability to pay,” and Reedman’s statement at the time of the hearing last April that Smillie was “impecunious” was not supported by any evidence, the panel stated.
In addition to the fines, the panel permanently banned Smillie from participating in B.C.’s investment market, except as an investor through a registered advisor. ezBtc is likewise permanently prohibited from trading its shares or engaging in any promotional activity, the commission stated Monday.
Where are the police?
The findings against Smillie are administrative and not civil nor criminal.
The commission has the ability to recommend criminal charges to the BC Prosecution Service, at its discretion. It may also forward a file to the RCMP’s Integrated Market Enforcement Team (IMET).
Glacier Media asked if it had done so.
“Section 11 of the BC Securities Act requires us to keep all information confidential unless our public duty requires us to disclose information like during public enforcement actions or legal proceedings. As a result, we are unable to confirm or deny whether we have forwarded this matter to IMET or recommended criminal charges,” stated spokesperson Elise Palmer.
The RCMP IMET did not respond to Glacier Media, which will update this article with any response, should it.
Crypto trading platforms that sell “futures contracts" whose value is derived from an underlying cryptocurrency asset — such as those that ezBtc entered into with customers — are subject to securities laws in Canada.
A list of crypto trading platforms authorized to do business with Canadians is available on the website of the Canadian Securities Administrators, of which the B.C. Securities Commission is a member.
