Lessons from the ezBtc scandal: Protect your exchange from internal bad actors
Trust is everything to crypto exchange users. Unfortunately, there are still incidents where this trust is misplaced. Canadian exchange ezBtc made headlines for the wrong reasons after founder David Smillie misappropriated millions in customer funds for personal use.
Our latest blog explores the incident and considers how exchanges can prevent similar scandals to ensure malicious actors don't damage the industry's reputation.
What happened at ezBtc?
Founded in 2016, the Canadian cryptocurrency exchange ezBtc claimed to store all its users' crypto investments in cold storage. Only three years later, in September 2019, ezBtc went offline, and by 2022, the platform was officially dissolved. A panel set by the British Columbia Securities Commission (BCSC) found that ezBtc and Smillie defrauded customers, misappropriating $13 million ($9.5 million) in user funds for their own purposes. Smillie is said to have used customer funds to gamble on sites like CloudBet and FortuneJack.
During its operation, ezBtc accumulated over 2,300 Bitcoin and over 600 Ether from investors trading on the platform. Despite cold storage claims, the reality was quite different. When customers attempted to withdraw their assets, they discovered funds were missing, resulting in significant financial losses.
The BCSC started investigating in 2019 after users filed complaints against the exchange. However, it wasn’t until May 2023 that the BCSC discovered Smillie had lied to customers about using their funds for gambling. In April 2024 the hearing took place, and in August 2024 findings were published with a sanction’s timeline set. The BCSC has said sanctions may include monetary penalties and/or bans on market participation.
So, what is an internal bad actor?
An internal bad actor is a full-time, permanent employee who deliberately and maliciously uses their company credentials to steal assets belonging to its customers. The threat is particularly insidious because it comes from within the organisation, making it difficult to detect and prevent.
Could the ezBtc scandal have been prevented?
The scandal had a significant impact on the investors who trusted the platform. Furthermore, it could damage wider investor confidence in cryptocurrency exchanges as it remained undetected for several years.
So, could this scandal have been prevented? The simple answer is yes. By implementing comprehensive protective measures from firms such as Coincover, exchanges can protect themselves and their users from internal bad actors such as Smillie.
The solution: Coincover’s Complete Protection
Preventing risks from happening is more effective than trying to solve a problem after the fact. Safeguarding against risks doesn’t have to be complicated. Coincover’s advanced monitoring tools can detect suspicious activity and mitigate risks, including threats from internal bad actors.
How does it work?
Choosing the right platform to entrust with your crypto assets is essential. Exchanges and wallet providers integrate with Coincover’s risk management platform to mitigate not just bad actor risk but a range of other common risks such as losing access to keys and fraudulent transactions.
In the case of ezBtc, with proper controls in place, Smillie would not have been able to transfer funds on his own accord.
Setting a higher standard of security to build trust
The Canadian regulators have intensified their crackdown on malpractice in the crypto market. In December 2023, the Alberta Securities Commission (ASC) ordered the Canadian crypto exchange Catalyx to cease trading following a security breach and loss of assets. Then, in May 2024, Binance faced fines from the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) for 'Administrative Violations’.' This latest action highlights that regulators remain vigilant in pursuing bad actors.
Exchanges that integrate added protection into their risk management set a new benchmark for security. By staying ahead of regulatory requirements and keeping funds protected, exchanges can enhance trust and confidence among users.
By using Coincover, you can protect your exchange from the inherent risks in blockchain. Going beyond regulatory requirements demonstrates your commitment to putting customers first and ensuring the security of their digital assets, giving them peace of mind.
Protect your assets now, book a meeting with the Coincover team to find out more.