B.C. crypto fraudster fined $18.4 million for gambling away clients’ cash

It came as a surprise to Shawn Murfitt to learn B.C.’s securities regulator has fined David Smillie a whopping $18.4 million for defrauding customers of his now defunct cryptocurrency exchange.

Murfitt — who lives in the Ottawa area — has spent three years and hundreds of dollars trying to recover just a fraction of that amount from Smillie with little to show for his efforts but a moral victory and a default order from a B.C. small claims court for $31,524.39.

“I’ve now ended up winning the case, but now have no repercussion out of it all,” Murfitt told CBC Monday in a brief telephone conversation.

“That’s kind of news to me there’s a sanction against him. I don’t know how all that will work, but then nothing going back to the people who were affected — that’s pretty disappointing.”

‘Cold storage, cold storage, cold storage’

In a decision issued last week, the B.C. Securities Commission (BCSC) ordered Smillie and his company ezBtc to pay the fine — which consists of an order for $10.4 million drawn up against customer losses and an administrative penalty of $8 million.

The decision came after Smillie and his company were found liable for telling customers like Murfitt their cryptocurrency was safe in so-called “cold storage” when much of it was instead funnelled — within minutes in some cases — to gambling websites and personal accounts..

Investors with David Smillie’s ezBtc exchange believed their cryptocurrency and cash was safe in “cold storage.” But regulators claimed much of it was being diverted to gambling websites. (Simon Dawson/Bloomberg)

“Smillie blatantly and repeatedly lied to customers as he authorized, permitted or acquiesced in the transfers of bitcoin and ether [another form of cryptocurrency] to his personal accounts and online gambling websites,” the penalty decision reads.

“He made excuses about non payments and threatened customers who complained publicly.”

Smillie’s ezBtc exchange operated as a “crypto asset exchange platform” offering a “unique savings program … to safely earn a nine per cent commission annually with daily payments.”

According to the BCSC’s findings on the case, customers deposited cash or cryptocurrency into ezBtc online accounts in exchange for accounts listing their buy and sell orders together with running tallies of assets they believed the exchange held on their behalf.

Smillie allegedly told customers one of his biggest “things” was “cold storage, cold storage, cold storage” — referring to a means described by the BCSC of holding cryptocurrency away from the internet “to make it safer from hacking.”

‘No evidence to substantiate Smillie’s illness’

The exchange took in more than 2,300 bitcoin and more than 600 ether between 2016 and 2019 — when ezBtc went offline amid frantic rumours from investors their investments had disappeared.

The customers who spoke with the BCSC claimed they “had varying degrees of success in withdrawing crypto assets or cash purportedly held in their accounts.”

“At some point all encountered difficulties and none were able to withdraw all of the assets that ezBtc purportedly held for them,” the BCSC findings stated.

The B.C. Securities Commission has fined David Smillie $18.4 million for defrauding customers through his cryptocurrency exchange. (CBC)

The regulator claimed a financial analysis showed Smillie and his company diverted 935.46 customer bitcoin and 159 customer ether for their own purposes — tracing significant amounts to CloudBet and FortuneJack, websites which advertise as bitcoin and crypto casinos.

Smillie didn’t attend the BCSC hearings himself, but was represented by a lawyer, who applied unsuccessfully to postpone the proceedings for three months at one point because his client was allegedly ill and penniless and needed time to raise money for his defence.

“There was no evidence to substantiate Smillie’s illness, and no evidence to suggest that Smillie could find sufficient funds to proceed in three months,” the BCSC wrote.

Nevertheless, Smillie denied the accusations of fraud.

He claimed the balances shown to customers “accurately reflected” the amounts of cryptocurrency or cash to which they were entitled — regardless of whether or not the assets were actually in their wallets.

The BCSC said that knowledge was cold comfort for investors who thought their money was safe, only serving to reinforce intentional lies “about the storage of crypto assets on the ezBtc platform.”

‘He thought about it every day’

The decision underscores the wild fluctuations in the value of cryptocurrency in recent years.

The regulator arrived at the amount of the penalty by calculating the value of missing bitcoin and ether as of July 1, 2019 — the midpoint of customer complaints — when it was worth $13 million.

The astronomical rise in the value of bitcoin has only served to fuel the anger of investors who lost money to David Smillie and ezBtc. The regulator said the missing cryptocurrency was worth $13 million in July 2019 and $94 million last April. (Chris Ratcliffe/Bloomberg)

The same amount of cryptocurrency was worth $1.7 million in late April 2017 and $94 million around the time of the liability hearing in April 2024. It is worth even more now.

According to Murfitt’s small claims court lawsuit, he deposited $30,000 with ezBtc in December 2017 when one bitcoin was worth about $12,000. The value has increased tenfold since then.

“You can do the math,” he says of his loss. “So, not just the money that vanished of what you put in, but what that money would be worth in today’s dollars.”

According to the BCSC findings one of the investors who testified at Smillie’s hearing said the astronomical increase factored into the stress of his 484 bitcoin loss.

One bitcoin was going for $1,700 when he deposited it with ezBtc in April 2017; it’s worth about $133,744 today.

“He thought about it every day,” the decision stated.

“Later when the price of bitcoin went up, he found it even more stressful. This experience affected his trust in crypto asset trading platforms as a whole.”