The case highlights the difficulty of establishing sanctions for fraudulent activity involving volatile crypto assets.
Following a sanctions hearing, the committee ordered Smillie and the company to jointly pay $10.4 million in disgorgement, and ordered Smillie to pay an $8 million penalty. He was also permanently banned from B.C.'s securities industry.
According to the commission's decision, “In this case, the defendants repeatedly lied to customers that crypto assets deposited on the ezBtc platform would be kept in cold storage by ezBtc to increase safety. , they diverted a significant portion of those assets to Smillie's personal accounts on other cryptocurrency exchanges and gambling websites.
“Smyly also repeatedly lied to customers about the reasons for their delayed withdrawals and non-payments. He threatened to sue customers for defamation who complained publicly.”
The Commission argued that Smillie said there was “no evidence that ezBtc's purpose was to defraud its customers” and that the uncertain regulatory situation for the cryptocurrency sector at the time (2016-2019) is an “important mitigating factor in establishing sanctions in this case.”
“We disagree,” the committee said. “Whether or not the respondents understood that their crypto trading platforms were subject to securities laws and Commission oversight, they had a legitimate expectation that they would be allowed to deceive their customers and deprive them of their assets. I couldn't.
BCSC staff sought a permanent suspension for Mr. Smillie, but the committee said Mr. Smillie argued that a 10-year suspension was more appropriate.
However, the commission sided with the regulator, ruling that “Smillie did not act in good faith or in the best interests of ezBtc's customers.” His actions are far below what market participants expect. He is not suitable to participate in the capital market. ”
“His claim that his actions were relaxed because there was regulatory uncertainty at the time is that there was no understanding or acceptance that fraud was unacceptable, regardless of how the activity was regulated.” “This shows that they are not continuing,” the newspaper said.
As a result, he was permanently banned from the market.
Regarding the establishment of monetary sanctions, this case highlighted the challenges regarding the valuation of crypto assets in enforcement proceedings.
In this case, the Commission found that ezBtc customers were deprived of 866.84 Bitcoins and 159 Ethers, and found that disgorgement should be ordered to deprive the perpetrators of the proceeds of their criminal acts. However, it noted that the value of these assets “has fluctuated significantly”. ” while cheating.
In fact, the value of the seized virtual currency reached approximately $1.6 million in early 2017, but increased to $13 million by mid-2019, leading to a BCSC hearing earlier this year. It was worth about $94 million at the time.
The Commission noted that BCSC is seeking disgorgement of $13 million, an amount that represents “roughly the midpoint of customer complaints to the Commission” in mid-2019. It argued that this represented a “reasonable approximation of the amount the respondents obtained as a result of the fraud.”
According to the committee, Smillie argued that disgorgement should be calculated based on the value of the virtual currency at the time it was acquired, rather than after the value has increased.
However, the Commission believes that it is impractical to assess the value of each fraudulent transfer at the time it occurs and that it is in the public interest to adopt a methodology that sets the value of lost assets as low as possible. I concluded that it would not.
Ultimately, the panel set the valuation date to April 30, 2018, the midpoint of the long period of fraud, and used data from CoinMarketCap.com to estimate that the cryptocurrency was worth approximately $10.4 million at that time. It was concluded that The company ordered Mr. Smillie and the company to disgorge in the same amount.
As for fines, BCSC had asked for $13 million, while Smillie had argued for $250,000, which the panel said was “woefully inadequate and unsupported by precedent.”
Instead, it ruled that the $8 million fine was “appropriate and proportionate and meets the need to send a clear message of specific and general deterrence.”
The company was in bankruptcy, had no assets or businesses, and “did not act independently of Smillie in its fraudulent activities,” the commission said.
