The founder of the now-defunct Canadian crypto exchange ezBtc was found guilty of misappropriating users’ funds. The exchange reportedly sent users’ funds to gambling websites.
An investigation led by the British Columbia Securities Commission (BCSC), a provincial regulator in Canada, found that ezBtc used customer funds for its “own purposes” while it was operational between 2016 and 2019.
Gambling away customer funds
BCSC alleges that David Smillie, the exchange’s founder, also received funds from the exchange, which was later sent to two gambling platforms, CloudBet and FortuneJack. The funds in question amount to 13 million Canadian dollars, approximately $9.5 million.
Specifically, the investigation revealed that 935.46 Bitcoin and 159 Ether had been diverted from the defunct exchange’s accounts to Smillie’s “exchange accounts” and sometimes directly to the gambling platforms. This accounted for about one-third of the platform’s total user assets.
The flow of bitcoin from ezBtc to Smillie’s Exchange Accounts corresponded with the flow of bitcoin from those accounts to CloudBet and FortuneJack. As more bitcoin came into Smillie’s Exchange Accounts from ezBtc, more bitcoin were sent from Smillie’s Exchange Accounts to the gambling sites.
The Vancouver-based exchange was live for three years before ceased operations in 2019, and was later dissolved on October 31, 2022. During this time, the platform held over 2300 Bitcoin and over 600 Ether in customer funds. The exchange claimed to have stored 99% of these funds in its cold storage.
Per the regulator’s findings:
The daily balance of ezBtc’s Bitcoin and Ethereum wallets never exceeded 11 bitcoin and 20 ether respectively.
BCSC’s findings also revealed that multiple customers who had deposited notable amounts of Bitcoin, amounting to 595 BTC, were unable to withdraw their funds. Some were also promised returns of up to 9% on their investments, which ultimately did not materialise as the funds could not be withdrawn.
Several of these customers have testified to contacting Smillie on multiple occasions to recover their locked funds but were met with false assurances. By 2019, Smillie had stopped responding to customer queries.
This was when the BCSC initially began investigating ezBtc following several customer complaints and multiple lawsuits.
As such, the BCSC has concluded that the “deceit” by Smillie and ezBtc “led to actual loss,” due to customers being unable to withdraw. Smillie could be facing monetary sanctions and other restrictions by September, the filing added.
Exchanges collapsing in Canada
Another Vancouver-based crypto exchange that resulted in losses for its customers was QuadrigaCX.
The exchange collapsed in 2018 after its co-founder Gerald Cotton suddenly died in 2018, allegedly taking with him information about private keys to the exchange’s wallets. The latest development in the case saw British Columbia authorities pursuing Michael Patryn, another co-founder.
Einstein crypto exchange, which was also based in Vancouver, shut down in 2019 after it was unable to repay customers due to a lack of profitability.
Recent investigations have revealed that the exchange manipulated customer dashboards and fed false information about transaction processing and asset availability. Further, the BCSC has charged Michael Ongun Gokturk, the exchange’s head, with operating the exchange as a Ponzi scheme despite the platform becoming insolvent in 2018.
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