A British Columbia Securities Commission (BCSC) panel has imposed an $18.4 million fine and a lifetime ban from the capital markets on ezBtc and its owner David Smillie.
The penalty stems from BCSC finding this past August that ezBtc, a Nanaimo, BC-based cryptocurrency trading platform, committed fraud by lying to its customers and diverting approximately $13 million of customer assets to gambling and the personal accounts of owner David Smillie.
“[Smillie] could not have had a legitimate expectation that it was permissible to defraud customers and deprive them of their assets.”
EzBtc, incorporated by Smillie and operational from 2016 to 2019, purported to customers that it was a platform to buy and sell various crypto assets while keeping customer assets in “cold storage.”
As opposed to hot storage, cold storage is the practice of keeping digital assets in an offline environment, typically long-term, to protect them from unauthorized access.
The panel found that, as the company’s director, Smillie was aware that ezBtc did not keep custody of all customer assets and should have been aware that diverting customer assets could result in serious financial consequences for those customers.
In recompense, BCSC’s executive director recommended a disgorgement penalty based on the defrauded amount of $13 million in addition to a matching administrative penalty. The disgorgement penalty was ultimately reduced to $10.4 million based on repayments made to customers, while the panel found an $8 million administrative penalty to be sufficient.
The panel found that Smillie committed the same misconduct as the company and would face the penalties jointly and severally, meaning with equal liability.
While the panel found no mitigating factors, Smillie submitted that the unclear and shifting regulatory landscape for crypto asset trading platforms between 2016 and 2019 was a “significant mitigating factor.” The panel found that, whether he understood securities law or not, Smillie “could not have had a legitimate expectation that it was permissible to defraud customers and deprive them of their assets.”
In its findings this past August, BCSC said ezBtc customers deposited more than 2,300 bitcoin and over 600 ether to the platform, approximately one-third of which was diverted to gambling websites or to Smillie’s personal accounts on other crypto trading platforms. In one case, a customer deposited 0.2495 bitcoin, sold it for over $2,500, and requested a withdrawal the next day. Despite multiple assurances from Smillie, the customer never received his money and a tracing revealed that the bitcoin had actually been transferred from ezBtc to a gambling website 14 minutes after the initial deposit.
Feature image courtesy Kanchanara via Unsplash.