QUADRIGA INITIATIVE
CRYPTO WATCHDOG & FRAUD RECOVERY PLATFORM
A COMMUNITY-BASED, NOT-FOR-PROFIT
$215 000 000+ USD
FEBRUARY 2019
CANADA
QUADRIGACX
DESCRIPTION OF EVENTS
"Cotten was a computer nerd who had entered the right business at the right time and succeeded beyond his wildest dreams. The broad outlines of his story were blandly conventional, at least if you subtracted his interest in decentralized monetary systems. He grew up in a large brick house on a quiet suburban street in Belleville, “The Friendly City,” a waterfront community between Toronto and Montreal best known for its cheddar cheese. In 2010 he graduated with a bachelor’s degree in business administration from an honors program at York University’s Schulich School of Business in Toronto. His parents owned an antiques store; Cotten decided to go into crypto."
"In April 2013, around the time that Cotten appeared in Vancouver, the price of a Bitcoin had risen to $266. But it was not easy to buy or sell if you lacked technological sophistication and considerable patience. Seventy percent of the global Bitcoin trade was conducted through Mt. Gox, a Tokyo-based exchange, and had to be funded by sending a bank wire to Japan." "In November 2013 Cotten and an older business partner, Michael Patryn, an authority on currency trading with passions for Brazilian jujitsu and luxury automobiles, incorporated the Quadriga coin exchange, or QuadrigaCX." "In a small, inefficient market, Quadriga swiftly distinguished itself." "QuadrigaCX initially attracted users because it seemed less risky than other bitcoin trading platforms. It had been licensed by FinTRAC, the Canadian anti-money-laundering task force, and Cotten often told reporters that the fact that the exchange was based in Canada meant that investors “know where their money is going.”"
“If you recall, back in the summer of 2013, there really weren’t many options here in Canada for people to buy and sell bitcoins…There was one exchange [Cavirtex] that was pretty much leading the pack….and then, other than that, you pretty much had to send a wire over to Japan [a reference to now-defunct bitcoin exchange Mt. Gox], if you wanted to buy Bitcoin…. You couldn’t hook up your bank account anywhere. It was just such a challenge.”
"Cotten’s efforts to win the trust of Bitcoin enthusiasts relied on his reputation in Vancouver, where he had become a director of the Bitcoin Co-op. He began to host the weekly meetups at Quadriga’s office. Quadriga sponsored local Bitcoin conventions and educational events, investments of $500 or $1,000 that yielded incalculable goodwill. Often Quadriga was the only Bitcoin company willing to pay for a sponsorship. “From our perspective, we needed Quadriga,” says Andrew Wagner, who at the time was the co-op’s director of public relations. “Without them, our events would have stopped. It put us in a particular place of need.”"
"In February 2014, six weeks after Quadriga launched, Mt. Gox abruptly suspended operations, claiming that hackers had stolen $473 million from customer accounts. A year later, Canada’s largest exchange, CaVirTex, announced its closure, also blaming hackers; the second-largest exchange, Vault of Satoshi, closed the same week. Overnight, Quadriga became Canada’s dominant Bitcoin marketplace. The following year it launched a bid to be listed on the Canadian stock exchange, submitting to a full financial audit. “We’re excited,” said Cotten at the time, “to be able to provide an unparalleled level of transparency.”"
In February 2015, "Unable to grow the company organically, Cotten and Patryn push forward with a plan to take Quadriga public. They raise $850,000 CAD in capital from Canadian brokerage houses Haywood Securities, Jordan Capital Markets, PI Financial, and Wolverton Securities." "Cotten ultimately abandoned the effort after a dispute with one of the major investors. Quadriga’s entire board resigned, leaving Cotten as Quadriga’s only full-time employee. Despite additional travails—a software glitch that lost C$14 million, a cease-trade order from the British Columbia Securities Commission after Cotten failed to file an audit, and CIBC’s seizure of C$21 million from one of its payment processors after the bank failed to determine its rightful owner—Quadriga profited wildly from Bitcoin’s giddy rise."
"Cotten is said to have operated the exchange from his MacBook, and while reports indicate he’d set a “dead man’s switch” that would forward access to the cryptocurrency keys required to handle up to $250 million worth of customer funds still in play, Cotten’s sudden disappearance has left users entirely out-of-pocket." “The normal procedure was that [QuadrigaCX founder and CEO Gerald Cotten] would move the majority of the coins to cold storage as a way to protect the coins from hacking or other virtual theft.” "Cotten, who appears to have overstated the company’s revenue, according to the auditors, reportedly juiced the volume of trades on the platform by creating fake accounts and using them to trade counterfeit bitcoin for real cash and cryptocurrency."
"Though the 30-year-old died in December 2018, according to his widow, it took more than a month for the cryptocurrency exchange to publicly reveal that he had passed away." "Just four days before the trip, the magazine noted, Cotten had written a will." "The Canadian crypto exchange announced on Jan. 14, 2019, that CEO Gerald Cotten had died while on honeymoon in India with his wife, Jennifer Robertson." "[C]ondolences flooded in from around the world. As the company explained, the 30-year-old had been nine days into his honeymoon in India, where he planned to open an orphanage, when he suddenly collapsed because of complications of Crohn’s disease." "But before long, the words of support and sympathy were replaced by panicked messages from investors: Where was their money?" "The deceased head of the exchange did not create any backup to recover the passwords of the exchange’s stored digital assets, resulting in the lockdown of cryptocurrency worth millions."
"When the company finally came clean and users scrambled to withdraw their money, QuadrigaCX’s website went dark." "In a sworn affidavit filed Jan. 31 with the Nova Scotia Supreme Court, Jennifer Robertson, identified as the widow of QuadrigaCX founder Gerald Cotten, said the exchange owes its customers roughly $250 million CAD ($190 million) in both cryptocurrency and fiat. The company previously announced it had filed for creditor protection on its website, but the filing itself provides greater details about its predicament." “The laptop computer from which Gerry carried out the companies’ business is encrypted and I do not know the password or recovery key,” Cotten’s widow, Jennifer Robertson, said in court filings, according to the Guardian. “Despite repeated and diligent searches, I have not been able to find them written down anywhere.”
"QuadrigaCX collapsed in 2019, leaving more than 76,000 investors from Canada and around the world collectively out-of-pocket for at least $169 million. Following a 10-month investigation, the OSC released a report stating that the crypto company was a Ponzi scheme." "Citing a creditor protection filing from the Nova Scotia Supreme court, the Globe and Mail states that the firm has been unable to locate or access the funds since Cotten passed on Dec. 9, leading to a liquidity crisis at the exchange. QuadrigaCX filed for creditor protection in compliance with the Companies' Creditors Arrangement Act (CCAA) on Feb. 1."
"[O]n Feb. 6, Quadriga “inadvertently transferred” certain cryptocurrency into cold wallets that the company is unable to access." "Ernst & Young said in its second report that it has confirmed that the insolvent company’s cold-storage, or offline wallets, continue to hold approximately 104 bitcoins. It had said that 103 bitcoins had been transferred out on Feb. 6." "The court-appointed monitor overseeing the search for the roughly $260 million owed to clients of the embattled QuadrigaCX cryptocurrency exchange says the bitcoin transfer it “inadvertently” made this month was due to a “platform setting error” that prompted the automatic transaction."
"The ruling by Nova Source Supreme Court Judge Michael Wood means that QuadrigaCX, which has been operating under the Companies’ Creditors Arrangement Act (CCAA) since the end of January, will file for bankruptcy, entering what is likely to be the final chapter in the exchange’s history." "Please be advised that on April 11, 2019, the Supreme Court of Nova Scotia issued a Termination and Bankruptcy Assignment Order outlining the process by which the Quadriga CCAA proceedings will be converted to bankruptcy proceedings under the Bankruptcy and Insolvency Act. A copy of the Termination and Bankruptcy Assignment Order is accessible via this link." "The transition to bankruptcy will give EY, which will become the exchange’s trustee, greater investigative powers over the company’s missing funds, as well as allow it to begin selling off assets such as its trading platform, which could generate some revenue to make its customers whole."
"The FBI began looking into the Canadian exchange in March last year, some three months after its CEO Gerald Cotten is said to have died in India due to complications related to Crohn’s disease." "Correspondence published by the outlet reveal that an FBI victim specialist has emailed former QuadrigaCX users, directing them to an online portal they can use to obtain more information." “As a Victim Specialist with the FBI – Albany, I’m contacting you because we have identified you as a possible victim of a crime,” “The enclosed brochure introduces you to the FBI‘s Victim Assistance Program and the types of assistance that may be available to you,”
"Miller Thomson LLP, the Toronto firm appointed to represent QuadrigaCX users, requests that the Royal Canadian Mounted Police also conduct an autopsy on Cotten’s body, “to confirm both its identity and the cause of death.” Citing the “questionable circumstances” surrounding Cotten’s sudden passing, the attorneys note “the need for certainty around the question of whether Mr. Cotten is in fact deceased.""
"The Ontario Securities Commission has spent 10 months investigating what happened to the Quadrigacx cryptocurrency exchange." "The downfall of crypto asset trading platform Quadrigacx (Quadriga) resulted from a fraud committed by Quadriga’s co-founder and CEO Gerald Cotten." “Clients entrusted their assets to Quadriga, which provided false assurances that those assets would be safeguarded,” reads the OSC report. “In reality [Gerald Cotton, Quadriga’s co-founder and CEO] spent, traded and used those assets at will.” "Cotten covered this shortfall with other clients’ deposits. In effect, this meant that Quadriga operated like a Ponzi scheme." "Another $28 million was lost when Cotten used client assets on three external crypto asset trading platforms without authorization or disclosure." "Under normal circumstances, these findings would likely have led to an enforcement action against Cotten and/or Quadriga. However, this is not practical given that Cotten is deceased and Quadriga is bankrupt, with its assets subject to a court-supervised distribution process. Nevertheless, we believe it is in the public interest to share our findings with the public to help investors understand what happened to Quadriga and hopefully prevent this type of situation from recurring."
"Notably, the Canadian tax authorities are also probing the doomed exchange for failing to pay corporate taxes." "First reported by The Globe and Mail on Monday, the Canadian tax authority is looking into the tax returns of the defunct exchange from between October 1, 2015, to September 30, 2018." "In March, the CRA collected a vast trove of documents from EY, and there’s no telling how long that will take to dig through, especially given current circumstances." “The CRA did not confirm a timeline of when the CRA Audit will be completed given the COVID19 pandemic,” the law firm said.
"Lawyers representing creditors of the collapsed exchange QuadrigaCX have hired blockchain forensics specialists to help with the ongoing investigation." "In a notice to creditors on Sept. 8, Miller Thomson said that Kroll will be working in collaboration with its strategic partner, Coinfirm, which specializes in blockchain forensics and anti-money laundering (AML) compliance." "Kroll, a division of New York-based financial consultancy firm Duff & Phelps, will not be tackling the project alone, however. It is joining forces with Coinfirm, a London-based blockchain analytics firm. Kroll will receive up to $50,000 USD for their efforts. And EY has provided a contractual indemnity of up to $150,000 USD—three times the professional fees—to protect Kroll from any lawsuits or negligence claims."
"The trustee for the collapsed Canadian crypto exchange QuadrigaCX has received $171 million in claims from the exchange’s customers." "In a Nov. 6 update filed with the Ontario Superior Court of Justice, EY revealed it has received 17,053 claims from customers who had entrusted their funds with the Canadian exchange." "The former users of the exchange are filing claims for digital assets including Bitcoin, Bitcoin Cash, Bitcoin Gold, Bitcoin SV, Ethereum, and Litecoin, along with Canadian dollars and US dollars." "EY said it wants to settle Quadriga users' crypto claims as of prices on April 15, 2019 — the date on which the exchange declared bankruptcy." "Cryptocurrency has been recognized as “property” for the purposes of the Bankruptcy and Insolvency Act by the Ontario Superior Court of Justice (Commercial List) in Re Quadriga Fintech Solutions Corp. et al.,[1] the first Canadian case of its kind. The Court also fixed the date of bankruptcy as the date for valuing claims denominated in cryptocurrency." "The Trustee is requesting an order of the Court to establish the currency conversion rates by which U.S. dollar and cryptocurrency claims will be converted into Canadian dollars for claim distribution purposes. The specific Date of Bankruptcy (April 15, 2019) rates that the Trustee intends to use are set out in the...chart."
"So far, EY has located $35 million (CA$46 million) to pay out to creditors. The amount represents a fraction of the total $190 million (CA$246 million) that went missing when the exchange went belly up early last year." "Two things have to happen before those claims can be filled. The first is that EY has to review each claim individually, and that takes time and money." "But the bigger holdup by far is that the Canada Revenue Agency needs to complete its audit of Quadriga’s tax liabilities, said Miller Thomson." "EY has not set any deadline for distributing the amount to the affected users."
This is one of the best known cases in Canada. QuadrigaCX became known through the Vancouver bitcoin community, and was one of the first exchanges to be FINTRAC registered as a valid money services business. Gerald Cotten was well known and even had regular office hours early in QuadrigaCX history. Quadriga was at one point pursuing public listing on the Toronto Stock Exchange. While other firms went bankrupt and folded, QuadrigaCX was able to continue operating for 6 years, even occupying 80% of the market at one point.
QuadrigaCX's success was the result of a few factors. Firstly, being able to spend customer funds for growth and marketing provides a competitive advantage over other firms. Gerald Cotten was exploiting the legal gray area in operating the platform, where other firms would not dare enter for fear of being shut down and losing all invested capital. Finally, by getting in early, QuadrigaCX had a strong advantage over other firms in the space.
HOW COULD THIS HAVE BEEN PREVENTED?
The collapse of QuadrigaCX is trivial to prevent. Funds were not stored offline in general, and no background checks were conducted on anyone with keys. There was no multi-signature wallet. There was no visibility of validation of backing.
Indeed, of the 15 rules in our proposed framework, QuadrigaCX violates every single one of them, and therefore it can be argued that any rule at all would have prevented or dramatically reduced the situation.
Infographic: An Overview of Compromised Bitcoin Exchange Events (Jan 30)
Q4 2019 Cryptocurrency Anti-Money Laundering Report - CipherTrace (Feb 12)
Messari - Bitcoin & crypto price, news, charts, and research (Feb 15)
100 Crypto Thefts: A Timeline of Hacks, Glitches, Exit Scams, and other Lost Cryptocurrency Incidents (Jan 25)
$356 million in cryptocurrency stolen in first three months of 2019 (Feb 15)
Report: Third Vancouver Crypto Exchange Investigated by BC Securities Regulators (Feb 22)
Bitcoin Scams and Cryptocurrency Hacks List - BitcoinExchangeGuide.com (Mar 5)
Brian Armstrong believes the QuadrigaCX fiasco may have been an accidental exit scam - Coin Rivet (Mar 7)
QuadrigaCX timeline: Every twist and turn in the bizarre crypto scandal (Mar 7)
QuadrigaCX Trustee (May 17)
QuadrigaCX: A Review by Staff of the Ontario Securities Commission - QuadrigaCX Report (May 17)
QuadrigaCX Users' Law Firm Launches Blockchain Analytics Investigation - CoinDesk (May 17)
Quadriga Was a Ponzi Scheme, Ontario Securities Regulator Says - CoinDesk (May 17)
Friday update : QuadrigaCX (May 17)
Canadian Regulator Unveils the Truth Behind Collapsed Crypto Exchange Quadrigacx – Bitcoin News (May 17)
QuadrigaCX Owes Customers $190 Million, Court Filing Shows - CoinDesk (May 17)
QuadrigaCX trustee only has $30M to pay $171M worth of claims (May 17)
Bankruptcy Court Weighs in on How to Value Bitcoins - Lexology (May 17)
QuadrigaCX trustee EY wants to settle users' crypto claims as of April 2019 prices (May 17)
quadrigacx – Amy Castor (May 17)
FBI contacts users of crypto exchange QuadrigaCX as investigation ramps up (May 17)
Nearly 17,000 Creditors Claim Refunds from QuadrigaCX (May 17)
Canadian Tax Authority Probing QuadrigaCX's Corporate Tax Returns (May 17)
QuadrigaCX: How To Lose $140 Million In An Instant (May 17)
Gerald Cotten's body should be exhumed, investors in QuadrigaCX tell court - The Washington Post (May 17)
The Secret Life and Strange Death of Quadriga Founder Gerald Cotten | Vanity Fair (May 17)
Quadriga Monitor Report 1 (May 17)
‘Platform error’ blamed for BTC being sent to Quadriga’s dead CEO’s cold wallet – Amy Castor (May 17)
Court monitor determines QuadrigaCX’s inadvertent transfer due to ‘platform setting error’ | Globalnews.ca (May 17)
QuadrigaCX Officially Enters Bankruptcy With Millions Still Missing - CoinDesk (May 17)
How the hell did we get here? A timeline of Quadriga events – Amy Castor (May 17)
Collapse of Quadriga crypto exchange was ‘old-fashioned fraud wrapped in modern technology’: OSC | Globalnews.ca (May 17)
SlowMist Hacked - SlowMist Zone (Jun 26)
CBC Podcasts - A Death in CryptoLand (Jun 26)
The 23 exchange hacks of 2019 (Aug 8)
https://www.bbc.com/news/world-us-canada-47203706?piano-modal (Jan 22)
https://www.cbc.ca/listen/cbc-podcasts/904-a-death-in-cryptoland (Apr 23)
Netflix Crypto Documentary: QuadrigaCX - Here's My Take!! - YouTube (Apr 30)
StopYTCensorship comments on Stolen Ethereum (Sep 12)
Why Finding Out QuadrigaCX's Cold Wallet Addresses Are Critical : BitcoinCA (Jan 1)
Did the QuadrigaCX CEO exit scam, by faking his own death in India? Apparently, there's a whole industry in India that provides fake doctors notes & fake death certificates to tourists. : btc (Oct 17)
Did the QuadrigaCX CEO exit scam, by faking his own death in India? Apparently, there's a whole industry in India that provides fake doctors notes & fake death certificates to tourists. : CryptoCurrency (Oct 17)
Did the QuadrigaCX CEO exit scam, by faking his own death in India? Apparently, there's a whole industry in India that provides fake doctors notes & fake death certificates to tourists. : QuadrigaCX2 (Oct 17)
Worldwide crypto & NFT rug pulls and scams tracker - Comparitech (Dec 15)
