Cryptocurrency Scheme in British Columbia Results in $18.4 Million Penalties

The BC Securities Commission tribunal handed down an $18.4 million fine against an individual found to be misusing a cryptocurrency trading service to cheat investors.

David Smillie, along with his corporately numbered entity 1081627 B.C. Ltd., doing business as ezBtc, was mandated by the authority on November 27 to return ill-gotten gains amounting to $10.4 million and to pay a further $8 million in administrative penalties.

Smillie was implicated in the misappropriation of client assets worth more than $13 million, diverting them for personal liabilities or for participating in online gambling activities.

Additionally, investors were deprived of potential financial gains due to the surge in bitcoin’s market value.

Having established ezBtc in 2016, Smillie served as the primary decision-maker for the firm.

He began by persuading individuals to deposit their bitcoin and ether, the cryptocurrencies, into his digital storage units, otherwise known as crypto “wallets,” through the ezBtc website, claiming it would promote further trading of the assets.

Smillie pitched a purportedly secure “unique savings program” that purportedly promised customers a 9% annual return, distributed daily, despite the fact that ezBtc levied various fees for deposits, withdrawals, and trading, as stated in the findings on his liability by the tribunal on August 7.

From 2016 to 2019, clients entrusted in excess of 2,300 bitcoins and over 600 ethers to their ezBtc accounts.

A probe was launched in 2019 following grievances raised with the commission.

One ezBtc client was defrauded of 484 bitcoins in 2019

During a commission session last April, four ezBtc clients who had been wronged were called upon to provide testimony.

For instance, a customer called “JJ” who asked for a $73,000 cashout in April 2017 was initially blocked from doing so.

When “JJ” later attempted to relocate his residual bitcoins, Smillie falsely asserted that the ezBtc website had been compromised and that roughly 484 of “JJ’s” bitcoins had been taken.

Eventually, in May 2021, Smillie handed “JJ” a personal cheque for $73,000 in Vancouver, though “JJ” was unable to recover his 484 bitcoins.

The panel noted that Smillie concocted excuses for non-payments and even intimidated clients who publicly aired their grievances.

The tribunal’s findings indicated that Smillie deposited a significant portion of the cryptocurrencies into his own personal accounts and onto online gambling platforms. The daily crypto balances of ezBtc never surpassed 11 bitcoins and 20 ethers, respectively.

According to the commission, Smillie and ezBtc engaged in intentional misdirection of their clientele’s cryptocurrency assets for their own benefit.

“Their deceit was patent and recurrent,” declared the tribunal in its summation, underscoring that Smillie blatantly deceived customers while orchestrating the transfer of bitcoins and ethers to his personal accounts and gambling websites.

“It’s self-evident that Smillie should have been aware of the risk posed to his customers’ financial interests by moving their assets to his personal accounts and gambling sites rather than maintaining their security in ezBtc’s cold storage,” the panel added.

The penalties were based on the July 2019 valuation of the unreturned cryptocurrencies.

According to the commission, the 935 bitcoins and 159 ethers, valued at around $13 million at that time, had soared to about $94 million by the previous April — with bitcoin’s worth rising around 30% since November compared to April.

Although Smillie was absent from the hearings, either in person or via videoconference, he was represented by lawyer Cody Reedman.

“We lack evidence of Smillie’s personal situations or his capability to pay,” stated the panel, pointing out that Reedman’s claim during April’s hearing that Smillie was “impecunious” was unsubstantiated by any documentation.

In conjunction with the monetary punitive actions, the tribunal also levied lifelong prohibitions against Smillie from engaging in BC’s investment market, save for investing through a registered advisor. Similarly, ezBtc is permanently barred from trading its stock or engaging in promotional undertakings, the commission dictated on Monday.

Where are the police?

The adjudications against Smillie are administrative in nature and do not constitute civil or criminal proceedings.

The commission has the discretion to recommend criminal prosecution to the BC Prosecution Service or to transmit files to the RCMP’s Integrated Market Enforcement Team (IMET).

When prompted by Glacier Media, the commission clarified its stance.

“In accordance with Section 11 of the BC Securities Act, we are bound to confidentiality unless our public duties mandate us to disclose information, such as during enforcement proceedings or in legal contexts. As a result, we cannot either confirm or deny any forwarding of this case to IMET or any recommendations for criminal indictments,” said the commission’s spokesperson Elise Palmer.

The RCMP IMET has not yet responded to enquiries from Glacier Media, who will update this story with any forthcoming response.

In Canada, cryptocurrency trading platforms dealing in “futures contracts”—the value of which is tied to underlying cryptocurrency assets, such as those entered into by ezBtc and its clientele—are subject to securities regulations.

The Canadian Securities Administrators, of which the BC Securities Commission is a constituent, maintains a list of crypto trading platforms authorized for operations with Canadians on their website.

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