Canadian Cryptocurrency Exchange QuadrigaCX Files For Creditor Protection

After weeks of uncertainty following the death of its founder, Canadian cryptocurrency market QuadrigaCX announced it had lost $190 million in customer cryptocurrencies. QuadrigaCX’s founder and CEO Gerald Cotten passed away on December 8th, 2018.

An affidavit filed on January 31, 2019 by the wife of the deceased, Jennifer Robertson, describes the situation plainly: that most of QuadrigaCX’s currency, in various forms such as Bitcoin and BitCash, was stored in “cold” wallets that only her husband Mr. Cotten had access to.

Wallets under heavy encryption

QuadrigaCX announced at the beginning of January that Cotten had died while conducting humanitarian work in India. Cotten had suffered from Crohn’s Disease, an inflammatory bowel disease that affects the digestive tract. It now appears this tragic outcome is even worse for QuadrigaCX investors.

In the affadavit filed by Ms. Robertson, she advises that all of QuadrigaCX’s cold wallets were stored on Cotten’s computer which is heavily encrypted. While this encryption ensured the security of the wallets while Cotten was alive, it now makes it impossible for Robertson or anyone else at QuadrigaCX to access those wallets, meaning that $190 million is locked up and effectively gone.

In the crypto world, hot and cold refers to the wallet’s connectivity. A hot wallet is connected to the internet, a cold one is not. A cold wallet is more secure, obviously- the equivalent of hiding cash under your mattress. It seems QuadrigaCX’s mattress is now locked in a vault at the bottom of the ocean.

CEO handled all transactions

Robertson goes on to describe the hot and cold wallet system. In short, customers can make deposits into their accounts and keep a certain amount available to them in their hot wallet. If they want to withdraw more, they have to wait for a transfer to be made from the cold wallet to the hot wallet. According to Robertson, all of the transactions between the hot and cold wallets was handled personally by Mr. Cotten.

It should be said: this is a solid precaution. There are stories of crypto markets being hacked all the time and the easiest way to protect something from bad people on the internet is to take it off the internet. However, having only a single point of access to anything is risky. The affidavit makes it clear Cotten run most of the company himself form his personal laptop. That’s fine – part of the appeal of cryptocurrency is its freewheeling and decentralized nature – but not having a backup way of accessing millions of dollars in customer assets borders on recklessness.

Not the first sign of trouble for QuadrigaCX

QuadrigaCX has had problems before. In 2017, CIBC froze their accounts, worth $28 million, and refused to restore withdrawal privileges. This led to a litigation process which resulted in QuadrigaCX being unable to find a bank to keep operating. It took nearly a year for the funds to be released. Robertson says in the affidavit that Cotten was paying user fees himself to keep QuadrigaCX going.

The QuadrigaCX website currently has nothing more than this message for visitors:

Message from QuadrigaCX Board of Directors

January 31, 2019

Dear Customers,

An application for creditor protection in accordance with the Companies’ Creditors Arrangement Act (CCAA) was filed today in the Nova Scotia Supreme Court to allow us the opportunity to address the significant financial issues that have affected our ability to serve our customers. The Court is being asked at a preliminary hearing on Tuesday February 5 to appoint a monitor, Ernst & Young Inc., as an independent third party to oversee these proceedings.

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. Unfortunately, these efforts have not been successful. Further updates will be issued after the hearing.

What’s next?

Customers of QuadrgiaCX are understandably furious, with posters on the company’s subreddit demanding everything for their money back to proof of Cotten’s death to assure them this isn’t all a big scam. While the demands for proof tread into internet conspiracy theory territory, the message is clear: Quadriga’s customers feel like they’ve been taken for a ride and they are furious. One of the paragraphs of the affidavit addresses these posts, saying Mrs. Robertson has received threats over Facebook messenger.

According to the message on QuadrigaCX’s website, the preliminary hearing with the Nova Scotia Supreme Court is set for Tuesday February 5th. We’ll be following this story and will have more details as they arise.

For more cryptocurrency news, subscribe to our newsletter, and for our list of exciting upcoming cryptocurrency events click here.