Investigation Reveals EZBTC Diverted One-Third of Customer Funds, Says BC Securities Commission

The British Columbia Securities Commission (BCSC) panel has issued a significant ruling against ezBtc, a cryptocurrency trading platform based in Nanaimo, BC, which has been found to have engaged in fraudulent practices that misled customers and diverted approximately $13 million of their assets. This determination comes after a protracted investigation, initially sparked by customer complaints received as early as 2019, culminating in formal allegations being laid against the company in May 2023.

EzBtc was incorporated by David Smillie and was operational from 2016 to 2019. The platform advertised itself as a secure venue for users to buy and sell a variety of cryptocurrencies, boasting the use of “cold storage” for customer assets. Cold storage refers to the practice of keeping digital assets offline to enhance security and mitigate the risk of unauthorized access, thereby assuring customers that their funds would be safe from cyber threats. However, the BCSC's investigation revealed that these claims were deceptive and unfounded.

According to the panel's findings, customers had entrusted ezBtc with deposits totaling more than 2,300 bitcoins and over 600 ethers. Alarmingly, nearly one-third of these assets were misappropriated, with funds being redirected to gambling websites and Smillie’s personal accounts on other cryptocurrency trading platforms.

A striking example highlighted in the findings involved a customer who deposited 0.2495 bitcoins, sold them for over $2,500, and promptly requested a withdrawal. Despite multiple reassurances from Smillie, the customer never received their funds. Investigative tracing revealed that the bitcoin had been transferred to a gambling website a mere 14 minutes after the initial deposit, underscoring the rapidity and severity of the misconduct.

The BCSC panel emphasized that as the director of ezBtc, Smillie bore a fundamental responsibility to safeguard customer assets and ensure the integrity of the platform. The panel concluded that Smillie was not only aware that ezBtc did not retain custody of all customer assets but also failed to recognize the gravity of diverting these funds, which ultimately led to severe financial repercussions for the affected customers. By permitting ezBtc's unlawful actions to persist, the panel determined that Smillie was complicit in the misconduct of the company.

During the hearings, Smillie did not personally appear but was represented by legal counsel, who informed the panel that he was out of the country, unable to afford legal fees, and suffering from an unspecified illness, according to reports from The Investigative Journalism Foundation. This absence raises questions about accountability and the legal responsibilities of company directors, particularly in the rapidly evolving and often volatile cryptocurrency market.

Following the panel's findings, the BCSC is now deliberating appropriate sanctions, which could involve substantial monetary penalties and bans from market participation for Smillie and potentially for the company itself. These sanctions are designed to uphold regulatory standards, reinforce consumer protection measures, and deter similar fraudulent activities within the cryptocurrency sector.

The case against ezBtc serves as a critical reminder of the inherent risks associated with cryptocurrency trading platforms and the imperative for transparency and accountability in their operations. As regulators continue to scrutinize the cryptocurrency landscape, the outcome of this case may have broader implications for how such platforms operate and how they are governed, potentially leading to more stringent regulations aimed at safeguarding investors and ensuring the integrity of the market. Stakeholders in the industry, including regulators, investors, and consumers, will likely keep a close watch on the proceedings as they unfold, emphasizing the need for vigilance in the rapidly changing digital finance environment.