Recently, a panel set up by the British Columbia Securities Commission (BCSC) found that cryptocurrency exchange ezBtc was responsible for defrauding users of $13 million in Bitcoin (BTC) and Ether (ETH) between 2016 and 2029. The exchange’s founder misappropriated the funds and caused “actual loss” to investors.
Cryptocurrency Savings Program Turns Into Scam
The UK Securities and Exchange Commission has found that ezBtc and its founder David Smillie committed a “securities fraud scheme” by deceiving customers about the cryptocurrency trading platform’s services. Found Smillie diverted approximately $13 million Canadian, equivalent to about $9.5 million US, of client assets “for their own purposes.”
EzBtc started operating in 2016 and presented itself as a cryptocurrency trading platform that offers a “unique savings program that allows clients to securely earn 9% per annum commission through daily payments.”
The exchange, which closed in September 2019 and was later dissolved in 2022, claimed to store “over 99% of Bitcoin and Altcoins in cold storage.” According to court documents, customers deposited 2,300 BTC and over 600 ETH into ezBtc between 2016 and 2019, worth $138 million and $1.62 million, respectively.
ezBtc’s founder alleged statements regarding the crypto assets’ safety. Source: BCSC
Smiley appears as the sole director of ezBtc in the exchange’s corporate register and remained in that position until it was dissolved two years ago. Additionally, he was the authorized signatory for ezBtc at two financial institutions.
According to the document, the CEO and founder interacted directly with customers through social media, text messages, phone calls and email. Customers and team members referred to him as “the owner.”
Smiley’s name was prominent in the witness clients’ dealings with ezBtc. Some of the complainants to the Commission also mentioned Smiley’s name.
The withdrawal and payment process appeared to be manual and customers had to wait between 7 and 10 days for standard withdrawals. Witness customers reported having varying degrees of success when trying to withdraw their crypto or fiat, but ultimately not everyone was able to withdraw assets held on the exchange.
One user testified that Smilie was responsible for “large” transfers. He deposited 595 bitcoins on the exchange in 2017 and sold some of them for $73,000 but never received payment. The customer later managed to withdraw 25 bitcoins to another exchange, which put him in contact with Smilie.
However, when the user tried to withdraw his remaining assets, the founder claimed that the site was hacked and his 484 BTC stolen. During the hearings, 3 other users shared similar experiences with the crypto exchange and Smillie.
Customer funds used for gambling
The British Columbia Cryptocurrency Regulator hired forensic data analytics firm Integra to conduct blockchain analysis and determine where user funds were located. The firm tracked the bitcoin and ether sent by users and found that “ezBtc did not hold customer assets in its own bitcoin and ether digital addresses.”
Destination of users’ assets. Source: BCSC
According to the analysis, part of the crypto assets deposited on the exchange were transferred directly to online gambling sites and Smillie accounts on various exchanges, including Kraken and Binance.
Similarly, the 223 BTC transferred from ezBtc to Smillie’s exchange accounts were later sent to CloudBet and FortuneJack, which “strongly suggests that Smillie used funds from ezBtc to fund his accounts on these gambling sites.”
Integra also discovered that the daily BTC and ETH balance on the platform never exceeded 11 Bitcoin and 20 Ether.
The Commission found that the exchange and Smiley “committed securities fraud” and diverted “935.46 bitcoin and 159 ether of customer tokens for their own purposes.” As a result, EasyBTC and its founder violated Section 57(b) of the Securities Act. The sanctions are expected to be filed and imposed next month.
Bitcoin (BTC) is trading at $59,190 in the weekly chart. Source: BTCUSDT on TradingView
Featured image from Unsplash.com, chart from TradingView.com