Canada’s largest cryptocurrency exchange, QuadrigaCX, has filed for credit protection in Nova Scotia, just the latest in a series of bizarre turns for the Vancouver-based Bitcoin dealer.
As many as 115,000 account holders are owed $250 million, which is locked up in “cold storage” only accessible to the recently deceased founder and CEO, Gerald Cotten
At the time of the bankruptcy filing, QuadrigaCX held 26,500 Bitcoin worth $120 million, 430,000 Ether worth $60 million and several million dollars worth of Bitcoin Cash SV, Bitcoin Gold, and Litecoin, according to court documents.
QuadrigaCX’s troubles started early last year when CIBC froze accounts affecting 388 customers worth $28 million, citing confusion about ownership of those funds. Those funds were finally released by an Ontario court in December, according to a statement from QuadrigaCX.
Just days later, Jennifer Robertson announced that her husband Gerald Cotten, 30, had died of complications due to Crohn’s disease in India on Dec. 9, while opening an orphanage.
The company also implemented withdrawal limits on its customers.
“Gerry’s death was a shock to all of us and we are deeply saddened by his passing,” reads the statement. “One of Gerry’s many accomplishments was his ability to build a highly capable and successful management team, which will continue his legacy.”
But the new management group has been handcuffed because much of the company’s cryptocurrency reserves are locked in so-called cold wallets — unhackable offline accounts — that cannot be accessed by anyone but Cotten.
In an affidavit, Robertson explains: “The laptop computer from which Gerry carried out the company’s business is encrypted and I do not know the password or recovery key.”
“Transfers from the cold wallet to the hot wallet would occur when the hot wallet was running low and withdrawals were being sent to users. The transfer of coins from the cold wallet to the hot wallet was performed manually by Gerry.”
The company keeps a “minimal amount” of coins on the hot wallet, a server that is accessible to account holders.
Cryptocurrency exchanges such as QuadrigaCX operate as “quasi-banks” with none of the oversight or safeguards that regulate banks and credit unions, said Chetan Phull, a lawyer who specializes in blockchain and cryptocurrency.
“It shows how nebulous the regulatory climate is in Canada with respect to cryptocurrency and that really needs to change or else another case like this could be just around the corner,” he said.
If QuadrigaCX is successful in obtaining credit protection, account holders could lose their ability to sue the company for compensation, he said.
A statement from QuadrigaCX’s board of directors poured cold water on account holders’ hopes to recover their investments.
“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. … Unfortunately, these efforts have not been successful,” it reads.
Robertson and QuadrigaCX have suffered from an angry backlash — including threats — from online cryptocurrency communities, in particular users of Reddit, her affidavit says.
Many apparent account holders complained on Reddit they had not been able to access their accounts for months, while others wondered openly if Cotten really died at all.
“Something stinks bad at QuadrigaCX,” wrote one user.
The court will be asked to appoint Ernst & Young Inc. as a monitor for the company on Feb. 5.
Jennifer Robertson’s affidavit