PART I: A FALL FROM GRACE
On Feb 5, Judge Wood of the Supreme Court of Nova Scotia granted QuadrigaCX 30 days of creditor protection. The law warrants that a 30-day protection is granted to companies which owe more than $5 million when they filed for bankruptcy. This allows such companies to restructure their finances to pay off their debts. However, Quadriga’s debts go far beyond $5 million. The company owes over $250 million in cryptocurrency and cash.
Ernst & Young was proposed as Quadriga’s monitor, and thus took on the task of reviewing and commenting on its cash flows. The recently published EY report revealed some bizarre information. It claimed that “the applicants do not have bank account(s) in their name…Furthermore, the proposed monitor has been advised that the applicants do not have accounting systems or accounting records available to them.”
For any company, in any industry on the face of the earth, these are huge red flags.
SO HOW DID ONE OF CANADA’S OLDEST AND LARGEST CRYPTOCURRENCY EXCHANGES END UP IN THIS SITUATION?
It all starts with the mysterious passing of Quadriga’s Co-Founder and CEO, Gerald Cotten. On January 14, 2019, Quadriga’s official Twitter account posted a statement from Cotten’s wife and Estate Executor, Jennifer Robertson. She said that back in December 2018, Cotten had died of complications with Crohn’s disease while building an orphanage for needy children in India. There was nothing in this statement that was particularly shocking except for the circumstances in which it was released.
Prior to the passing of its CEO, $26 million of Quadriga’s fiat had been frozen by the Canadian Imperial Bank of Commerce (CIBC) on the grounds of compliance issues. This resulted in ongoing court battles between the bank and exchange, with the regulating court having seized this money as routine when multiple parties stake a claim to the same funds. After a while, it seemed that there was no out for Quadriga, which is when Cotten’s death was revealed.
All of a sudden, the exchange went offline for unscheduled maintenance procedures, leaving thousands of users in disarray. It was already known that $26 million of Quadriga’s CAD was yet to be released, but subsequent news stories revealed the really dark nature of what was going on behind the curtains. Quadriga’s cold storage, where thousands of digital coins are housed, only had one private key. Meaning it could only be accessed by one person: Gerald Cotten.
According to an affidavit signed by Robertson, she claims that Cotten was the custodian of:
- 26,500 Bitcoin (BTC)
- 11,000 Bitcoin Cash SV (BSV)
- 25,000 Bitcoin Gold (BTG)
- 430,000 Ethereum (ETH)
- 200,000 Litecoin (LTC)
Those coins are worth a whopping total of $190 million. Meaning any withdrawal requests being made by Quadriga clients can no longer be filled. The exchange has officially collapsed.
WHICH BRINGS US TO THE CONSPIRACY THEORIES…
Many people, including several former Quadriga clients, have been complaining about the “convenient” nature of Cotten’s passing. When his company was taking hits from banks and legislators, he decided to fly to India for the noble cause of building an orphanage and then passed away from a disease that has a 3% mortality rate. Not to mention, cryptocurrency, after years, still remains largely unregulated in Canada. Which significantly binds the hands of officers trying to recover those funds.
In other words, if this was a last minute exit strategy hashed out by the co-founder, it really will have minimal consequences, since there are no major legislators holding these exchanges accountable. It’s like trying to find the Nigerian Prince your grandma keeps sending money to.
Despite the tasteless nature of accusing someone of faking their own death, these theories may hold some ground. Quadriga had been facing serious withdrawal issues since last October. This led to legal battles with CIBC which were supposedly funded out of Cotten’s own pocket. Moreover, the tweets leading up to the scandal continued to portray the company in control of the situation, keeping their clientele intentionally in the dark while they continued to accept their deposits. Additionally, the fact that there was only 1 private key for an exchange worth millions of dollars is frankly unbelievable. Most industry leading exchanges will employ a multi-signature wallet that requires multiple parties to access the funds in case of emergencies.
KrakenFX, a major cryptocurrency exchange that functions both in the United States and Canada has publicly announced that they are able to track thousands of wallet addresses belonging to QuadrigaCoinEx. Ultimately, the open source nature of cryptocurrency makes it easily traceable, thus allowing for funds associated with larger parties like Quadriga to be tracked using analytics software. KrakenFX has promised to publish a detailed report of their findings and urge the RCMP to take action against Quadriga.
Many believe that these revelations have exposed the cryptocurrency world for what it truly is; a fad and nothing more. However, those who understand the inner workings of this technology can see its transformational capacity. If anything, the fall of Quadriga reveals the desperate need for regulations in the Canadian cryptocurrency markets. Hopefully, through that, no other exchange will be able to pull off a ruse like this in the future.