[REN #686] $200 Million Lost in Crypto Company

Picture of Two People Holding Coin for Real Estate News for Investors Podcast Episode #686

The plot thickens in the death of a Canadian crypto exchange CEO and the disappearance of almost 200 million dollars in deposits. His widow says he was the only one with access to a cold storage vault where much of those funds were allegedly stored, but there are growing concerns that the currency is simply “missing.” It’s a tough lesson for more than 100,000 customers who are now planning legal action to try to recoup their losses.

The QuadrigaCX website has been taken down and replaced with a message to customers. It doesn’t contain very good news. It says the company has been unsuccessful at accessing cryptocurrency reserves held in an offline cold storage vault or vaults and has filed for creditor protection. That gives the company at least 30 days to resolve the situation without the threat of lawsuits. The company can also extend that protection, if needed. (1)

Meantime, the Court has appointed Ernst & Young as a monitor, while the company promises to “make every effort to address our customer obligations.” But the message also warns that the company is in “the early stages of a long process” and refers customers to the Ernst & Young website for updates.

Coindesk reports that the company owes customers a total of about 190 million U.S. dollars in cash and cryptocurrencies. Most of the cryptocurrencies are allegedly locked in that cold storage vault, with smaller amounts in more accessible hot wallets.

There are now rumors that this isn’t true. A blog called “Zerononcense” posted the results of an investigation in blockchain transfer patterns that casts doubt on official statements. It claims to have found no signs of money transferred to a cold wallet or vault. It also says that it appears the company possesses substantially fewer bitcoins than previously reported, has not lost access to those coins, and has transferred at least some of those funds to other crypto exchanges.  (2)

The Wall Street Journal also reports that the funds may simply be “missing”. It cited a filing from Ernst & Young which says the company was “unable to access the cold wallets and/or discovered that the cold wallets contained minimal cryptocurrency units.”
 

Quadriga CEO Died While Traveling

Let’s go back a few months to the death of CEO Gerry Cotten. His wife, Jennifer Robertson said on the company’s Facebook page that he died on December 9th due to complications from Crohn’s disease “while traveling in India, where he was opening an orphanage to provide home and safe refuse for children in need.” She says she searched their home in Nova Scotia, where he has his office, but has been unable to find passwords or business records to unlock the vault.

She claims that he moved millions of dollars in digital assets into an offline cold storage location on his laptop for security reasons, to prevent hacking, and was the only person to have access. His laptop was encrypted, and computer experts have been unable to break that code.

A Cornell University professor and blockchain adviser told Wired, “It’s astounding to me that a company of this size can be run with the same accounting procedures of Joe’s Fish ‘n Chips, with a single person in charge and no accountability.” He says it’s “far from the norm” and not good for the cryptocurrency industry. (3)
 

“Far from the Norm”

Wired points out that larger crypto companies typically have at least two people managing cold storage, each with their own access keys. They also usually have a backup plan to access funds if the keys are lost.

From what Robertson has reported, Cotten was the only one running the show. The company was launched in 2013 when holdings were small, so that may have been sufficient, back then. A co-founder who left the company in 2016 told Wired that Quadriga had insurance to cover potential losses during its early days, so having one person in charge wasn’t cause for concern. But Quadriga grew into one of the largest cryptocurrency exchanges in Canada, apparently without a change in this process.
 

Unusual Timing for Last Will and Testament

Bloomberg reports another unusual twist in the story — that Cotten filed his last will and testament just 12 days before he died. He left everything to his wife including several properties, a new Lexus, a private airplane, a yacht, and two pet chihuahuas. It did not include a backup plan for accessing that cold storage vault.

Robertson’s message on Facebook said, “Gerry cared deeply about honesty and transparency — values he lived by in both his professional and personal life. He was hardworking and passionate, with an unwavering commitment to his customers, employees, and family.”

In the meantime, customers have no idea if they’ll get their money back. Many people are in disbelief about Cotten’s death and their missing bitcoins. Legal proceedings are already underway, and it appears that customers are banding together for a class action lawsuit. It’s too soon to know the full story about QuadrigaCX and the whereabouts of millions of dollars in crypto deposits. We’ll have to wait to see how this situation shakes out in court.

There’s certainly a lesson here for people putting their money into cryptocurrencies, which many believe will grow into a more secure global monetary system. For now, crypto is still in its infancy, without much regulation, leaving customers more vulnerable. This is a great example of a good technology that has gone wrong, and also the need for caution and due diligence when venturing into the cryptocurrency world.

Links:

(1) QuadrigaCX Website

(2) Zerononsense Blog

(3) Wired Article

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