B.C. Crypto Exchange Founder Fined $18.4M for Misusing Client Funds on Gambling

The B.C. Securities Commission (BCSC) has imposed an $18.4 million fine on David Smillie, the operator of the now-defunct cryptocurrency exchange ezBtc, for defrauding customers and misusing their investments. The penalty includes $10.4 million in compensation for customer losses and an $8 million administrative fine.

According to the BCSC, Smillie falsely assured customers their cryptocurrency holdings were secured in "cold storage," a method designed to protect assets from hacking by keeping them offline. In reality, Smillie diverted substantial amounts of bitcoin and ether to gambling websites like CloudBet and FortuneJack, as well as to his personal accounts.

Fraudulent Practices

EzBtc, which operated from 2016 to 2019, offered a "savings program" promising annual returns of nine percent. Customers deposited funds into ezBtc’s online platform, believing their investments were secure and accessible. Instead, the exchange’s operations unraveled in 2019, leaving clients unable to withdraw their assets as ezBtc abruptly went offline.

The BCSC investigation revealed that over 2,300 bitcoin and 600 ether were deposited by customers during the exchange’s operation. Of these, 935 bitcoin and 159 ether were traced to Smillie’s personal use. The regulator determined that Smillie repeatedly lied to customers, misrepresented their account balances, and threatened those who publicly complained.

Investor Losses

The regulator calculated the value of the misappropriated cryptocurrency at $13 million as of July 1, 2019. However, the value fluctuated dramatically, peaking at $94 million during the liability hearing in April 2024, and continues to rise. For many investors, the soaring value of bitcoin added to their distress.

One investor lost 484 bitcoin, which was worth $1,700 each when deposited in 2017. Today, the same amount is valued at over $133,000 per bitcoin. Another victim, Ottawa resident Shawn Murfitt, deposited $30,000 in 2017 when bitcoin was valued at $12,000 each. That investment would be worth over ten times its original value today.

Murfitt, who pursued a small claims court case against Smillie, secured a default judgment for $31,524.39 but has yet to recover any funds. “Winning the case doesn’t change anything,” he said. “It’s disheartening knowing that affected investors might never see restitution.”

BCSC Ruling

Smillie did not attend the BCSC hearings, citing financial hardship and health issues. The commission rejected his requests for delays, citing insufficient evidence of his claims. In his defense, Smillie maintained that customer accounts accurately reflected their entitlements, even if the corresponding assets were not physically held in ezBtc wallets.

The BCSC dismissed his arguments, stating Smillie’s actions demonstrated a pattern of deception that eroded trust in cryptocurrency exchanges.

A Lesson for Investors

The BCSC’s ruling underscores the risks associated with unregulated cryptocurrency platforms. While the regulator’s decision holds Smillie accountable, victims like Murfitt remain skeptical about ever recovering their funds.

“I hope this serves as a warning for others,” said Murfitt. “Crypto investments need better oversight to protect investors from fraud.”