How crypto exchange QuadrigaCX lost access to $190 million of customers’ money

Canada's largest cryptocurrency exchange, QuadrigaCX, says it is seeking creditor protection.
Canada's largest cryptocurrency exchange, QuadrigaCX, says it is seeking creditor protection. Robin Utrecht/ABACAPRESS.COM

QuadrigaCX, one of Canada’s best-known cryptocurrency exchanges, says it does not have access to $190-million worth of customers’ funds and is seeking creditor protection, according to court documents filed on Thursday in Nova Scotia.

The parent company of the B.C.-based exchange lost access to cryptocurrency worth an estimated $190 million at current market value after the death of its 30-year-old CEO, Gerald Cotten in December, court filings show. The “missing coins” are held in so-called “cold wallets” that were managed single-handedly by Cotten, who died suddenly of complications of Crohn’s disease during a trip to India.

Cold wallets are a type of offline storage commonly use to hold cryptocurrency deposits and protect them from hackers and other digital threats. Cotten held the virtual keys to the cold wallets and was solely responsible for transferring funds between cold storage and a “hot wallet” maintained on the company’s server, according to the documents.

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The company currently has only $375,000 in cash and owes a total of approximately $260 million to around 92,000 customers, according to the filings.

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The announcement follows a tumultuous few months for Quadriga, which became known in the crypto community for significant delays in processing large withdrawal orders from clients.

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‘I’m kicking myself’ — Quadriga’s customers worried about what comes next

Global News has heard from several individuals over the past three weeks who said they were unable to take money out of their Quadriga accounts.

One of them, Eric Z., who asked that his full name not be used, showed a withdrawal order for $100,000 — money he says he never received.

“I’m kicking myself for leaving so much money in the exchange,” he told Global News via email. The funds are part of a handsome $125,000 profit that Eric said he made on an initial investment of just $5,000 in 2014.

Eric was initially able to withdraw $30,000 from Quadriga without issues. But he regrets leaving the rest of the funds in the exchange until December when he tried and failed to withdraw the remaining $100,000.

Despite users reporting trouble making withdrawals, Quadriga continued to take deposits until Jan. 28.

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Currently, Quadriga has access to around $30 million in bank drafts held by its payment processors. The company, though, proposes using at least part of those funds to finance the proceedings related to its application for creditor protection. 

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“The residual balance of these funds, combined with net recoveries from other sources, would be made available to satisfy the claims of Quadriga’s creditors,” reads an affidavit filed by Cotten’s widow, Jennifer Robertson.

A difficult relationship with Canada’s banks

Much of the $30 million was the object of a legal battle between Quadriga and CIBC. According to court documents from the Ontario Superior Court of Justice, the bank froze $28-million worth of funds held by Quadriga’s payment processor, Costodian, and its owner Jose Reyes. CIBC said it was unsure who the funds belonged to after receiving wire recalls from several depositors asking for their money back. By early December, the court released the funds back to Costodian but the company has not been able to find a financial institution willing to accept them, according to Robertson’s affidavit.

In a past interview with Global News, Quadriga’s CEO, Gerald Cotten, had blamed the company’s processing delays on a lack of support from Canada’s banks for the country’s crypto-related businesses.

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Quadriga CEO’s unexpected death

Quadriga’s affairs appear to have unravelled shortly after Cotten’s death.

Roberston announced her husband’s sudden and unexpected death on Jan. 14 in a statement through Quadriga’s website.

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“Gerry died due to complications with Crohn’s disease on December 9, 2018 while travelling in India, where he was opening an orphanage to provide a home and safe refuge for children in need,” a statement on the company’s site read.

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Cotten was the sole officer and director of Quadriga and its parent companies, according to court filings. Robertson, the executor of Cotten’s estate, is now trying to manage the company’s unwinding despite having no involvement in the business while her husband was alive, the court filings show.

“The laptop computer from which Gerry [Gerald Cotten] carried out the Companies’ business is encrypted and I do not know the password or recovery key,” Robertson’s affidavit reads. “Despite repeated and diligent searches, I have not been able to find them written down anywhere.”
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Attempts by an expert retained by Quadriga to recover access to the funds and the company’s business records have been similarly fruitless so far, the documents show.

The company either has no accounting systems or is not capable of producing “even the most basic of accounting summaries,” reads a report by Ernst & Young, Quadriga’s proposed monitor in the creditor protection proceedings.

Quadriga has not responded to attempts by Global News to seek comments via email, social media, and phone.

No deposit insurance, lack of regulatory oversight

Quadriga, founded in 2013, was meant to provide a user-friendly platform for individuals to buy, sell and trade cryptocurrency. Users could deposit regular currency with the company through bank wires, bank drafts, and other payment methods, and would be credited with Quadriga Bucks, which they could use to buy a variety of digital tokens.

But the company, like many others in the cryptocurrency industry, received little regulatory oversight.

Quadriga’s application for creditor protection “highlights the need for proper regulation and better understanding of what cryptocurrency exchanges are actually doing when it comes to security and backups,” said Brian Mosoff, an angel investor focused on blockchain and cryptocurrencies and CEO of Ether Capital.

“This is still very much an industry in development, where best practices are still being formed,” Mosoff said via email, adding that the experience with Quadriga might spur customers to demand more transparency from exchanges.”

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For now, users have few protections. In Canada, federal and provincial deposit insurance doesn’t extend to cryptocurrencies. This means that if their digital wallet provider or crypto exchange goes bankrupt or is hacked, customers are likely on their own.

A full-day hearing for Quadriga’s creditor protection application is scheduled for Tuesday, Feb. 5 in Halifax.

— With help from Global News online reporter Alexander Quon

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