Home Opinions The Quadriga CX Saga and its Lessons: What We Can Do to...

The Quadriga CX Saga and its Lessons: What We Can Do to Protect Ourselves from Such Cases

February 07, 2019 12:01

This page is being updated regularly to reflect the latest developments of this case.

Lessons
Share with your friends

If you deal with cryptocurrencies, by now you might have heard of the thing going on at Canadian exchange Quadriga CX. The founder of exchange, namely Gerald William Cotten, died on a trip to India and took with him the keys to cold storage wallets which held $190 million worth of crypto reserves belonging to his company. The users of exchange are now wondering whether they’ll ever receive their lost money or not. There’s a very interesting story in this whole development, and some important lessons to be learned for every crypto trader. Here we’re going to talk about all those things. Let’s get started.

A story of death, dogs, two countries, and $190 million

Before we can understand the lessons given by this it’s important to know the whole story. If you were already keeping an eye on all developments then you can skip directly to the next section of lessons, otherwise we would suggest that you read the whole story first.

Ad

The strange saga of Quadriga CX started in the midst of January when Quadriga announced the demise of its founder through a Facebook post. The post said that Cotten had died on 9th of December while traveling to India. Why was he traveling to India? To set up an orphanage in the Pink City. We don’t know what happened to that orphanage, but Cotten died in Jaipur because of the complications arising from Crohn’s disease (he was already suffering from this disease, according to his wife and company).

Now, the announcement was made more than a month after the death of Cotten. This is the first suspicious thing about the whole story – why did it take the company a whole month to declare that its CEO is dead? Moreover, nothing was mentioned in that announcement about the financial crisis arising after his death. For the whole month of January, users couldn’t withdraw their funds (both fiat as well as cryptos) from Quadriga. And then suddenly one day the exchange went offline for maintenance (on 29th of January to be precise). The maintenance didn’t end even after a whole week.

Then one week later came the biggest shocker: the company had filed for creditor protection! This step is taken to avoid being sued by the creditors and to avoid bankruptcy proceedings. The statement released after filing for creditor protection was the first time when company acknowledged the issue arising from the death of its boss. It was the first time when Quadriga acknowledged that the keys of cold wallets in which company held significant cryptocurrency reserves have gone to the grave of Cotten along with him. As more details emerged, it was revealed by the company that there were reserves worth more than $190 million in those cold wallets, and since Cotten was highly serious about the security he used to manage the keys of cold wallets himself. His laptop, email, messaging client – all are encrypted. And nobody knows the passwords – including his wife Jennifer Robertson.

Proof of Death (PoD)

People in crypto community generally talk about Proof-of-Work (PoW) and Proof of Stake (PoS), but this was the first time when they were talking about Proof of Death. When it was found that keys to $190 million are gone with Cotten, all hell broke loose. People just couldn’t believe what they heard. There were several conspiracy theories on the matter, largely revolving around whether the death has been faked to run away with funds of users. Many people in the community – including Kraken CEO Jesse Powell – accused Quadriga of mismanaging user funds and asked for a Proof of Death. On Change.org a petition was started by the users of exchange asking Kraken CEO to take over the management control of Quadriga and honor the withdrawal requests of users.

Now, while there was no proof of death until now, a death certificate issued today by Rajasthan Government showed that he indeed died in India. The place of death was Fortis Escorts Hospital in Jaipur, but the hospital has not responded to any queries on the matter (update: the hospital has now confirmed Cotten’s death in a statement). People are arguing that it’s pretty easy to fake a death in India, where professionals exist to generate fake death certificates on demand. Moreover, the surname of Cotten was spelled incorrectly in the certificate! While it’s common for Indian officials to misspell a foreign name, the users in crypto community are taking it as another sign that the certificate may be fake.

The will

Adding more weight to the conspiracy theories is the will that Cotten has left for his wife. According to Bloomberg, the will was filed only 12 days prior to his death. It was signed on 27th of November, 2018, and in the will he has left all his assets – including a plane, a yacht, several real estate properties, and two pet dogs – to his wife Jennifer. He has made her the executor to his estate, the documents now reveal.

Now, while it’s a standard practice to update the will before traveling to foreign countries if one has got significant assets, the crypto community doesn’t seem to be buying this argument.

The story of reserves

Another twist in the story of Quadriga came two days ago (on 4th of February). An analysis of Quadriga’s cold wallet addresses done by Zerononcense seemed to suggest that the exchange doesn’t have any identifiable cold-storage wallets and it has never held more than 1,000 BTC in user funds. This report added a new question to the already long list of unanswered questions in this story: did $190 million in crypto holdings of Quadriga ever exist?

Update on 8th of Feb: This particular conspiracy theory would’ve had less weight, but it got more support yesterday (on 7th of Feb) from other blockchain analysis experts who said that Quadriga doesn’t seem to have held any Ether balances in cold wallets. Instead, it was probably moving ETH to other larger exchanges in January!

Important Lessons to Learn

Now, whether Quadriga CEO has died indeed or not is a matter of question at this point. While his death seems confirmed after the issuance of the death certificate and statement of Fortis Escorts hospital, the possibilities of a coup can still not be ruled out completely (especially because there’s a large amount of money involved). There are too many twists and turns in this plot to be solved, and nothing can be said with certainty as of now. However, one thing is certain – the users of exchange are now highly at the risk of losing their money forever.

Now, such a scenario may unfold at any exchange. By the scenario I mean the inability of users to withdraw their funds – not exactly the death of founders. There may be any reason behind it, but by the time you come to know anything about it you may stand to lose all your crypto as well as fiat balances. And the worst part is that in India you won’t even get any protection for your funds from RBI, as the central bank has warned people several times against dealing in cryptocurrencies. Therefore, it’s up to you to ensure the security of your funds, and this episode unfolding at Quadriga teaches a lot about that. Here are 3 things that you can learn from the entire story:

  1. Never use just one exchange: This single step can go a long way in protecting you from huge losses in such circumstances. If you use just one exchange for all your trading, you have created a single point of failure for yourself. God forbid, but if anything goes wrong with that exchange then you can guess what will happen. We’ve seen our own episode of Coinsecure, though it was slightly different from this one. The funds were returned in that case, but only partially. So use multiple exchanges for trading, and divide your trading activities equally among them.
  2. Get out quickly: If you see anything fishy going on at any exchange, never load more money into it. Quadriga was already having several legal issues even before the death of founder, and due to those issues many times the withdrawals of funds had been halted. For instance, funds of $22 million were frozen in the bank accounts of exchange by Canadian Imperial Bank of Commerce back in October as the bank was unable to determine whether Quadriga indeed owns those funds or not. If users would’ve stopped using Quadriga immediately after that, perhaps their losses would’ve been smaller. But the company kept assuring users of a resolution, and many of the users continued to use the exchange, thus multiplying their losses.
  3. Act collectively: One thing happening positively in the case of Quadriga is that the users of exchange have decided to join their forces. Led by Xitong Zou of Ontario, who has lost the highest amount of funds in this case (as much as C$560,000), they’ve made an informal committee to take legal action against the company. Whether these efforts turn out to be fruitful or not will be seen in future, but at least it puts the pressure upon companies to do something justifiable for covering up any mismanagement that was on their part. Courts usually deliver verdicts favorable to users in such cases, so if you become the victim of any such instance (again, God forbid) then it’s better to organize your efforts with efforts of others who have lost like you.

It will be interesting to see how many more turns come into this saga before its conclusion, but this is a classic case study to keep in mind for every crypto trader. Don’t forget it, and heed the lessons given by it. You’ll be much less likely to face huge losses in such scenarios.

Technology and business were my core interests, so it wasn't surprising that I got interested in cryptocurrencies, which operate at the intersection of both these things. Now I live my passion by trading cryptocurrencies and covering Cryptocurrency news. You can connect with me on Facebook to learn more about me. :)

LEAVE A REPLY

Please enter your comment!
Please enter your name here