QuadrigaCX - This is Why There Needs to be Regulation
If you are in the crypto space, you’ve probably been following the QuadrigaCX story closely. This is a great example of how things can go badly wrong for traders but let’s just go over it again and see what the manifestations are thus far.
The Canadian crypto exchange allegedly can’t retrieve about C$190 million ($145 million) in Bitcoin, Litecoin, Ether and other digital tokens held for its customers, according to court documents filed Jan. 31 in Halifax, Nova Scotia. Nor can Vancouver-based Quadriga CX pay the C$70 million in cash they’re owed.
Access to Quadriga CX’s digital wallets appears to have been lost with the passing of Quadriga CX Chief Executive Officer Gerald Cotten, who died Dec. 9 in India from complications of Crohn’s disease at 30 years of age.
Is Cotten Really Dead?
Cotten was always conscious about security. His laptop, email addresses and messaging system he used to run the 5-year-old business were encrypted, according to an affidavit from his widow, Jennifer Robertson. He took sole responsibility for the handling of funds and coins and the banking and accounting side of the business and, to avoid being hacked, moved the majority of digital coins into cold storage. Which seems like a wise move as 2018 was a record breaking year for crypto exchanges hacked.
There was gossip about whether Cotten was or was not indeed dead. Many blogs and websites pointed out that Crohn’s disease is rarely fatal at his age and apparently it is very easy to get a fake death certificate in India. The sudden death of the only one able to access the cold storage wallets seemed suspicious for sure.
Following these rumours the hospital he was treated at released the following statement:
The statement by Pragya, an official spokesperson of Fortis Escorts Hospital in Jaipur stated "The patient died here in Fortis and was brought in an extremely critical condition,"
New Indian Express states that the press release surrounding Cottens passing, explains that Cotten was brought to the facility December 8, 2018 around 9:45 PM. The patient had a history of Crohn's disease and was on monoclonal antibody therapy. Cotten was diagnosed at the hospital with a case of septic shock, perforation peritonitis, and intestinal obstruction.
Cottens condition deteriorated from there, the press release states "At 2:45 pm, Cotten suffered a cardiac arrest but was revived by CPR. he also suffered two subsequent episodes of ventricular tachycardia (fast heart rhythm) for which cardioversion was conducted," the report indicates that Cotten suffered a second cardiac arrest, but could not be saved. He was declared dead at approximately 7:26 PM on December 9, 2018.
The problem is, Jennifer Robertson, his widow said she can’t find his passwords or any business records for the company. Experts brought in to try to hack into Cotten’s other computers and mobile phone met with only "limited success" and attempts to circumvent an encrypted USB key have been foiled, his widow, who lives in a suburb of Halifax, said in the court filing.
"After Gerry’s death, Quadriga’s inventory of cryptocurrency has become unavailable and some of it may be lost," Robertson said, adding that the company’s access to currency has been "severely compromised" and the firm has been unable to negotiate bank drafts provided by different payment processors.
The Plot Thickens
Since February 5, the company has been under creditor protection and Ernst & Young has done an audit on their financial activities. However, the information released by the monitor on Friday seems to bring troublesome news for the platform and its customers.
The audit firm identified six separate cryptocurrency wallets that were used to store Bitcoin (BTC). However, it seems that there have been no deposits in the wallets since April 2018, with the exception of a transaction of nearly $500,000.
On Feb. 14, Bloomberg reported that deceased QuadrigaCX founder Gerald Cotten may have stored paper copies of the exchange’s private keys in a safety deposit box. Previously, on Feb. 5, Bloomberg wrote that Cotten filed a will 12 days before his death, mentioning his wife Jennifer Robertson as the only beneficiary and the executor to his estate.
The beauty of most cryptocurrencies is that transactions are traceable. You can tell your users the sad story of funds being lost in cold storage but after checking more vigilantly it became clear that the funds were in fact not even there.
Regulation Can Help
Christine Duhaime, BA, JD, CAMS, practices law with Duhaime Law in Vancouver. Released her story on Coindesk on March 26th, 2019. She was the regulatory attorney, hired to help their securities attorney in Canada draft a statutory prospectus.
Duhaime Law agreed to act for QuadrigaCX because it was subject to the oversight of several regulatory agencies across Canada. It was registered with FINTRAC, Canada’s FinCEN, and subject to compliance examinations, which are akin to the examinations the IRS conducts on U.S. exchanges with MSB registration; it was a reporting issuer in two Canadian provinces and subject to the oversight of two securities regulators, which is akin to being subject to two SECs supervising its activities; and it was registering in the province of Quebec for anti-money-laundering purposes with that province’s securities regulator.
Not only that, QuadrigaCX had cold storage insurance over its customers’ digital currencies. This was 2015, and if you were in the space back then, you know what a feat it was to secure cold storage insurance for a digital currency exchange.
She believes it may have been the first exchange in the world to have cold storage insurance.
QuadrigaCX had, at that time, four different law firms advising it on different matters, two national law firms and two specialized firms, ourselves included. It had a public chartered accountant who prepared financial statements of all its bitcoin trades, its finances and customer holdings. And it also had an independent auditor from an accounting firm and it had audited financial statements.
In 2015, it was pretty much unheard-of for a digital currency exchange to have an auditor and to prepare audited financial statements that it made available to the public. It was more transparent than many exchanges today. That however changed abruptly. CEO, Gerald Cotten, made the decision that he no longer wanted QuadrigaCX to be a listed company. On that day, he terminated the professionals that were, in his mind, the “law and order” folks – the accountant, the auditor and the regulatory attorney.
This is why it is crucial for any institutions that deal with customers’ funds to have to adhere to the rules and regulations. How did an exchange that was so in tune with the laws and even got its customers’ funds insured ahead of time suddenly go rogue and make their assets disappear into thin air? Right now the situation is still unclear. Hopefully from this instance regulators and people will learn. Only then can we pave a new era in crypto.