QuadrigaCX’s trouble explained

Theories about QuadrigaCX’s business practices have made headlines for weeks, following the death of the crypto exchange’s CEO Gerald Cotten.

“People feel cheated, short changed,” said Dean Skurka, vice-president of crypto exchange bitbuy. He said those who used QuadrigaCX are looking for answers

Cryptocurrency is private by design and isn’t well regulated in Canada. The QuadrigaCX case has many details that are tantalizingly vague, which leaves room for speculation.

The Signal spoke to experts to help sort through these rumors.

QuadrigaCX used clients’ money to cover transactions

Some users became suspicious of QuadrigaCX’s practices after noticing the exchange was using their money to pay other users taking out Bitcoin. Although this was not an issue in and of itself, this soon lead to other questions.

“If I deposit one Bitcoin, does it have to be the exact Bitcoin that I get back if I need to withdraw it? The answer is typically no,” said Skurka.

A problem develops, said Skurka, when the exchange doesn’t have another Bitcoin to cover the original deposit.

Adam Goldman, president of bitbuy, said without proper control of the money flow, an exchange could easily lose track of it. He said it’s possible QuadrigaCX didn’t have enough control over that part of their system.

Only the CEO had access to the cold wallets

Another aspect of QuadrigaCX’s users found suspicious was Cotten was the only once with access to cold wallets.

Cold wallets are cryptocurrency accounts that are not connected to the internet, designed to securely store cryptocurrency.

Goldman said crypto exchanges often use something called a multi-signatory cold wallet, which gives more than one person access. In 2015 Cotten said his company used multi-signatory wallets. But, in an affidavit filed in the Nova Scotia Supreme Court, Cotten’s wife Jennifer K.M. Robertson said her husband was the only person with access.

While it’s not unusual for a company to control cold wallet access, Skurka said it is unusual QuadrigaCX didn’t have better access policies given the size of its trades.

QuadrigaCX is missing money

QuadrigaCX is supposed to have approximately $190 million dollars in Bitcoin, Litecoin and Ethereum locked on Cotten’s laptop. In Robertson’s affidavit she said there is just under 430,000 Eretheum (approximately $68 million CAD) on the laptop.

Taylor Monahan, CEO of Ethereum wallet app MyCrypto, has been analyzing QuadrigaCX’s cold wallets on the Ethereum blockchain.

“What I didn’t find, which is more interesting, is that you would expect one of these accounts to have a significant amount of ether (cryptocurrency) in it because that’s what the court documents say. That’s what they’ve been saying,” she said.

“I didn’t see a pile of money being wiped out in the last year. It’s never really been a huge pile of money that I can see.”

A Bitcoin analyst who writes under the pseudonym Zerononcense has done similar research on the Bitcoin blockchain and found QuadrigaCX had similar practices for Bitcoin.

So far, anyone who has analyzed blockchains associated with QuadrigaCX’s wallets has not been able to find large sums of money.

Is this a scam?

Because no one has been able to find evidence that there are the sums of money that QuadrigaCX claims to have on Cotten’s laptop, there is a deep mistrust in the user base. So many users are wondering if QuadrigaCX was running an exit scam.

Monahan said it doesn’t look like a scam, as those typically involve someone taking out a bunch of money before disappearing.

If her analysis is correct, it’s more likely that QuadrigaCX was running into financial trouble at the same time Cotten was having health issues.

Cotten’s Death

Some users don’t believe Cotten is actually dead.

I’d like to file a motion to take a look at the body. How do I do that?

— Maskingtape (@AllonMessenberg) February 5, 2019

But, as part of the QuadrigaCX case, a statement of death from J.A. Snow funeral home was submitted to Nova Scotia Supreme Court. The Government of Rajasthan’s Directorate of Economics and Statistics released Cotten’s death certificate. The Fortis Escort hospital in Jaipur, India, where he died released a statement about Cotten’s condition when he showed up for treatment.

QuadrigaCX’s case will continue on Feb. 14 at Nova Scotia Supreme Court.