After the founder
of Canada’s biggest cryptocurrency exchange, QuadrigaCX, died unexpectedly,
about 115,000 clients have been unable to retrieve $190 million in holdings —
because the owner was the only one who knew the password to access them, the
company said.
Gerald
Cotten, 30, died of complications with Crohn’s disease while doing
philanthropic work in India in early December, according to a post on
QuadrigaCX’s Facebook page. The company didn’t announce Cotten’s death until
more than a month after he died, and as customers panicked and tried to
withdraw their funds, QuadrigaCX’s website went down, and the company went off
the grid.
When
QuadrigaCX broke its silence a week later, the company revealed it had filed
for creditor protection in the Nova Scotia Supreme Court, according to
reporting from Coindesk. Evidently, Cotten was the sole person responsible for
transferring QuadrigaCX funds between the company’s “cold wallet” — secure,
offline storage — and its “hot wallet” or online server, according to court documents.
Very little cryptocurrency was stored in the hot wallet for security purposes.
Cotten’s laptop was encrypted, and his widow, Jennifer Robertson, and the
expert she hired have been unable to access any of its contents. The company
had no corporate bank accounts and used third-party services to manage payments
and withdrawals.
“For the
past weeks, we have worked extensively to address our liquidity issues, which
include attempting to locate and secure our very significant cryptocurrency
reserves held in cold wallets, and that are required to satisfy customer
cryptocurrency balances on deposit, as well as sourcing a financial institution
to accept the bank drafts that are to be transferred to us,” QuadrigaCX’s board
of directors said in a letter to customers on
Jan. 31. “Unfortunately, these efforts have not been successful.”
The debacle
highlights the problems with cryptocurrency’s lack of regulation. It’s not
issued by a government or controlled through a centralized financial
institution, leaving exchanges such as QuadrigaCX with near total control over
investors’ assets and making them vulnerable to hackers or other mishaps.
The
mysterious circumstances surrounding Cotten’s death have spawned many
conspiracy theories, especially on Reddit, where several users have suggested
that Cotten is faking his death as part of an exit scam. Some Reddit sleuths
and cryptocurrency researchers have looked into QuadrigaCX’s holdings and found
activity from accounts only Cotten had access to after the company said he
died. But Robertson provided the court with a copy of Cotten’s death
certificate, court records show, and Robertson said she and QuadrigaCX’s
interim chief executive have been hit with threats and “slanderous comments” by
angry customers.
QuadrigaCX
had been plagued with legal trouble in the past year: In early 2018, the
Canadian Imperial Bank of Commerce froze more than $25 million of QuadrigaCX’s
assets after noticing “irregularities” in the exchange’s payment processes. The
Ontario Superior Court of Justice took control of the funds, Coindesk reported,
and they were returned to the company days before Cotten’s death.
Now, the
company is looking into selling its operating platform to stay afloat.
Robertson has asked the court for a stay of proceedings to protect the company
from lawsuits and buy time while QuadrigaCX tries to access the cryptocurrency
tied up in its cold wallets. She also asked the court to appoint international
accounting firm Ernst & Young to oversee its dealings while QuadrigaCX
tries to recover the lost holdings.
