The Collapse of QuadrigaCX: What We Know (And What We Don't)

QuadrigaCX, the Canadian cryptocurrency exchange, made headlines the world over last week when it announced it was filing for creditor protection and owed upwards of $130 million or more to its customers.

The long-suffering exchange has had banking issues for more than a year, and customers complained they could not easily withdraw fiat or crypto over the past several months. Fears that the exchange may be insolvent or running a scam were exacerbated by an announcement that its founder and CEO, Gerald Cotten, died of Crohn's disease while in India.

After weeks of poor communication (and several days of the website going offline entirely), the exchange announced it was filing for a stay of proceedings in an attempt to head off any customer lawsuits while it tries to recoup its funds and figure out its next steps.

The situation as a whole carried echoes of the Mt Gox scandal, both in terms of the degree of global interest (many mainstream news outlets and publications have run stories, centered primarily around the stated inability to access customers funds following Cotten's death) and the scale of future uncertainty.

As CoinDesk reported on Tuesday, the legal picture surrounding the exchange is beginning to solidify. A Nova Scotia Supreme Court judge granted the exchange its application, giving it a 30-day stay of proceedings to try and recover any cryptocurrencies, as well as find other avenues for reimbursing customers.

Yet many questions swirl around the proceedings, further fed by the theories propagated by QuadrigaCX customers, observers and critics. Below, we explore some of the biggest questions as they currently exist.

Quadriga owes a lot of money

QuadrigaCX says it owes roughly 115,000 people some C$190 million in both fiat and crypto. These 115,000 customers are part of a larger group of nearly 300,000 individual accounts created, though it appears that the remainder doesn't currently store any funds on the exchange.

In a court filing last week, Cotten's widow and the executor of his estate Jennifer Robertson claimed that neither she, nor anyone else on the QuadrigaCX team, knew how to access the exchange’s crypto reserves – or indeed, where they might even be located. The exchange holds roughly 26,500 bitcoin ($92.3 million USD), 11,000 bitcoin cash ($1.3 million), 11,000 bitcoin cash SV ($707,000), 35,000 bitcoin gold ($352,000), nearly 200,000 litecoin ($6.5 million) and about 430,000 ether ($46 million), totaling $147 million, according to the affidavit.

Cotten reportedly conducted all of his business operations out of an encrypted laptop, which Robertson has been unable to gain access to. While a consultant has been hired to try and break into the laptop, this expert has so far been unsuccessful.

While the timing of the move hasn't been confirmed, the laptop will ultimately be given to professional services firm EY, which was appointed monitor by the court.

Compounding the exchange’s problems is the fact that much of its fiat reserves are tied up after a well-documented legal fight with the Canadian Imperial Bank of Commerce. There is no timeline yet for when those funds might be restored.

All told, the exchange estimates that it owes customers about $53 million in fiat and $137 million in crypto (in U.S. dollars).

Not all of Quadriga's funds are in crypto

According to its court filing, about $70 million CAD ($53 million USD) of its funds are held by payment processors in fiat.

Of that, about $30 million CAD ($23 million USD) is held by payment processor Billerfy in the form of bank drafts. Billerfy has explained in the past that it was having difficulty finding banking partners to endorse these drafts, preventing it from releasing the funds back to the exchange.

During the discussion in court Tuesday, Quadriga attorney Maurice Chiasson, a partner with law firm Stewart McKelvey, asked whether EY – the monitor appointed to oversee Quadriga's efforts – might be able to assist in finding a banking partner to endorse the drafts. It is unclear whether this is a possibility, and EY declined to comment when reached.

In an email, Billerfy managing director and owner José Reyes told CoinDesk he had not yet heard from EY, and was not sure what the next steps would be now that the company has been appointed as monitor.

He added in a later email that he has not had any luck finding banking partners to endorse the drafts yet.

Lawyers for Quadriga also control a further $5 million held by several New Brunswick, Canada-based companies. However, these funds may be used to organize bankruptcy processes and other administrative tasks, Chiasson explained.

Quadriga has 30 days under the existing order

Tuesday's stay grants Quadriga 30 days to try and recover its missing cryptocurrency reserves, as well as unlock its fiat holdings and look for other assets that can generate revenue. In an early filing, EY indicated that the exchange could sell its trading platform as one such revenue generator.

An initial report will be due on March 1, and another hearing will be held at the end of the 30-day period to determine what progress Quadriga is making.

It's possible that the exchange will file for an extension to the stay during that hearing, though Chiasson said in court Tuesday that "it is our hope that as and when significant events develop, [such as if] we find a significant store of coins, we would immediately [begin distribution]."

There will be a separate hearing to determine which law firm will be appointed as representative counsel on Feb. 14, though no lawsuit can be filed while the stay is in effect.

A request for clarification to Bennett Jones LLP, one law firm vying to be appointed, was not returned by press time.

Still, numerous questions surround the entire situation, including whether the exchange ever had the funds it claims are currently locked up in cold storage.

If there are really any cold wallets

One of the most concerning claims in Thursday’s affidavit was that the team is currently unable to access cold wallets holding Quadriga’s reserves. However, prominent voices in the crypto community are casting doubt on this assertion.

MyCrypto’s founder and CEO Taylor Monahan told CoinDesk that she would be "very surprised to learn of a cold storage ether address" based on how the exchange managed its holdings with three primary wallets.

"Almost all of the largest transactions are either sent to exchanges or amongst three ‘primary’ addresses … I haven’t seen anything indicating a large reserve or cold storage mechanism being used on the Ethereum chain," she explained.

That does not mean the exchange has no cold storage wallets at all – but while it is possible, Monahan explained that she would find it “improbable” based on the exchange’s past practices.

The differences in what the blockchain data appears to be saying about Quadriga’s holdings and what the exchange claims have led to further questions about the existence of the funds at all, sparking allegations of fraud on the part of the exchange and its operators.

What’s the deal with the multi-sig wallets

In 2015, Cotten said the exchange used multi-signature wallets as a security precaution. Multi-sig wallets typically see multiple parties maintaining control of a part of a wallet’s private key.

In such a scenario, two or more of the parties would have to sign a transaction before it can be approved. However, no other Quadriga employees appear to have announced themselves as able to sign off on transactions.

In other words, the question remains whether there was a multi-sig wallet, where Cotten single-handedly managed all of the signatures, or if this security precaution was not actually taken.

What comes next

As stated, Quadriga now has 30 days of breathing room to try and find its missing coins, as well as unfreeze its fiat holdings.

What is less clear is how the exchange might proceed.

An email account set up by EY Canada to accept messages from Quadriga creditors was not functional as of press time. While Quadriga has released a new statement on its website, specifics were not included.

Instead, the website's statement noted that "we are in the early stages of a long process," and that the work was ongoing.

"What we can tell you is that the CCAA process will allow QuadrigaCX to keep all options open to attempt to maximize the funds available for the company's stakeholders. We will provide further updates to the extent possible," the statement reads.

Whether Cotten is really dead

Despite two separate documents stating that Cotten died on Dec. 9, 2018 in Jaipur, the capital city of the Indian state of Rajasthan, online conspiracy theories continue to claim that he faked his death in order to pull an exit scam.

J.A. Snow Funeral Home, which issued a statement of death on Dec. 12, refused to confirm or deny that it actually issued the document. Calls to the Nova Scotia Department of Vital Statistics, which tracks life events (including deaths) were not returned by press time.

Separately, the Government of Rajasthan's Directorate of Economics and Statistics produced a death certificate for Cotten on Dec. 13, which CoinDesk obtained and published Tuesday. No cause of death was listed and further inquiries were not returned.

Angel House, an organization which builds orphanages in India and has been affiliated with Cotten in the past, did not pick up when called.

Anna Baydakova and Yogita Khatri contributed reporting.

Canadian flag image via Shutterstock