Ponzi Scheme Unraveled: QuadrigaCX Exchange Founder Dies with Private Keys, Leaving Funds Inaccessible

Canada's once prominent cryptocurrency exchange QuadrigaCX came to an end in a large scandal of "founder's mysterious death, disappearance of hundreds of millions of dollars," with the Ontario Securities Commission defining it as a "Ponzi scheme."

By: Lou Yue

Gerald Cotten founded Canada's largest cryptocurrency exchange, QuadrigaCX, in 2013. However, in December last year, Gerald Cotten mysteriously passed away while on his honeymoon in India with his wife, Jennifer Robertson. Cotten happened to be the only one with access to the exchange's cryptocurrency private keys, leading to approximately $190 million in cryptocurrency being untraceable.

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The latest investigation report released by the Ontario Securities Commission (OSC) regarding the collapse of the cryptocurrency exchange QuadrigaCX has once again put it under the spotlight. Report

Most of the findings by OSC investigators align with the conclusions from last year's report by QuadrigaCX's bankruptcy trustee Ernst & Young, attributing the exchange's closure and subsequent bankruptcy to its CEO and co-founder Gerald Cotten.

The OSC report confirms that Gerald Cotten misappropriated at least $143 million of customer assets through cryptocurrency trading and burned through at least $2 million for his personal expenses.

The report details Cotten's use of aliases, falsification of account balances, and trading with QuadrigaCX's customers. When cryptocurrency prices fluctuated and customers withdrew, Cotten used other customers' deposits to cover the losses, which OSC refers to as an "effective Ponzi scheme."

In addition, a new finding by OSC staff involves the analysis of the whereabouts of all assets, an unresolved issue in the Ernst & Young report. Cotten lost $143 million through trading on QuadrigaCX or other platforms, with only $23 million (approximately 10-15% of the total) unaccounted for.

The report speculates that the unaccounted $23 million may include trading losses on other platforms, fees paid to other platforms, fees paid to other payment processors, other operational expenses, and other assets transferred for personal use. However, this finding also suggests that there may not be a specific fund waiting for QuadrigaCX's creditors to discover. According to OSC's statement, about 40% of these investors are from Ontario.

Founded in 2013, QuadrigaCX met its demise in 2019. ChainNews takes you through the full journey of QuadrigaCX from glory to collapse over seven years.

Founded in November 2013

According to Wikipedia, Quadriga was established in November 2013, initially conducting local transactions. In December 2013, QuadrigaCX was launched and became the first Canadian exchange authorized by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

In 2014, Bitcoin trading volume on Quadriga reached $7.4 million CAD. In January 2014, QuadrigaCX installed its second Bitcoin ATM in Vancouver.

In 2016, when other directors resigned, Gerald Cotten became the sole director.

In 2017, Bitcoin went through a speculative frenzy, soaring from around $1,000 to nearly $20,000. Approximately $1.2 billion CAD worth of Bitcoin was traded on QuadrigaCX. The significant increase in business volume raised commissions, but due to reliance on external payment processors and lack of proper accounting, it also led to cash flow issues.

In June 2017, QuadrigaCX announced a loss of $14 million worth of Ethereum due to a smart contract error.

April 2018, QuadrigaCX Faces Complaints of Delayed Withdrawals

According to a report by vancouversun Vancouver Sun, QuadrigaCX faced complaints from investors regarding delayed withdrawals, sometimes having to wait for weeks or even longer.

In response, QuadrigaCX CEO Gerald Cotten explained that the hot market at the beginning of the year brought in "20 times the daily trade volume," but due to recent crackdowns on Bitcoin by Canadian regulators, it led to a backlog of transactions.

October 2018, CIBC Freezes $28 Million CAD of QuadrigaCX Funds, Awaiting Court Decision

According to The Globe and Mail, QuadrigaCX is awaiting a legal decision regarding a lawsuit against the Canadian Imperial Bank of Commerce (CIBC). The case began in January 2018 when CIBC froze multiple accounts opened by QuadrigaCX payment processors, claiming uncertainty about whether individuals trading on the exchange or depositing funds to buy cryptocurrencies owned the funds in the accounts. As the exchange couldn't access the funds, some customers experienced delays when attempting to withdraw from the platform. The amount involved is $28 million CAD (approximately $21.6 million USD).

A Reddit account claiming to represent the exchange stated that once a judge rules on the motion, the exchange will immediately take legal action against CIBC to compensate for the significant losses incurred.

November 2018, Ontario Superior Court Gains Control of Frozen QuadrigaCX Funds

Ontario Superior Court Justice Glenn Hainey granted an order on November 9th to the Canadian Imperial Bank of Commerce (CIBC) to control $26 million CAD in funds until ownership of the funds is established.

January 2019, QuadrigaCX Founder Gerald Cotten Reportedly Passes Away

On January 14th, Jennifer Robertson, wife of QuadrigaCX founder Gerald Cotten, issued a statement on behalf of QuadrigaCX confirming Cotten's passing over a month earlier.

February 2019, Intensifying Events at QuadrigaCX

1. QuadrigaCX Applies for Creditor Protection

QuadrigaCX filed for creditor protection in the Nova Scotia Supreme Court, seeking the appointment of Ernst & Young as an independent third party to oversee its proceedings.

2. Court Documents Show QuadrigaCX Owes Users $190 Million

Documents provided by Jennifer Robertson to the Nova Scotia Supreme Court indicate that QuadrigaCX owes its customers around $250 million CAD (approximately $190 million USD) in cryptocurrency and fiat currency.

Court records show that as of January 31, 2019, approximately 115,000 users had balances registered with the exchange, with fiat funds totaling $70 million CAD and crypto assets totaling $180 million CAD.

The court documents state that only a minimal amount of cryptocurrency was stored in hot wallets without specific information provided. The exchange's founder appears to be the only one who knew or had control over QuadrigaCX's cold storage solution. Following his death, the exchange's stored cryptocurrency became inaccessible, with some possibly being lost.

3. Ernst & Young Submits Preliminary Report

On February 5th, QuadrigaCX held a hearing in a Canadian court.

QuadrigaCX sought auditing services from professional consulting firm Ernst & Young (EY). According to the preliminary report submitted by EY, QuadrigaCX had no bank accounts and instead used third-party payment processors. With no formal accounting system, audits were conducted from a cryptocurrency notebook located at Cotten's home in Fall River, Nova Scotia.

There are multiple factors contributing to QuadrigaCX's current issues, including the lack of company bank accounts and Cotten's death. EY has recommended QuadrigaCX to temporarily halt its website.

3. Indian Government Death Certificate Confirms QuadrigaCX CEO's Death in India

According to a death certificate issued by the Indian government obtained by CoinDesk, QuadrigaCX CEO Gerald Cotten did pass away in early December in India.

4. Gerald Cotten Signed Will 12 Days Before Death, Leaving $9.6 Million CAD to Wife

According to Bloomberg's report, court documents reveal that QuadrigaCX's founder and CEO Gerald Cotten signed a will 12 days before his sudden death on November 27, 2018, leaving his assets of $9.6 million CAD to his wife, Jennifer Robertson.

5. EY Report: QuadrigaCX Mistakenly Sends 103 BTC to Deceased CEO's Cold Wallet

In a preliminary report released on February 12th regarding the progress of Quadriga's creditor protection application since late January, court-appointed monitor Ernst & Young (EY) stated that the company unintentionally transferred 103 Bitcoins (valued at $468,675) on February 6, 2019, to the deceased CEO's inaccessible cold wallet. EY will take control of the remaining funds of the exchange, transferring the remaining cryptocurrency in the exchange's hot wallets to EY's own cold wallets.

The report mentions EY's control over various electronic devices used or owned by the former CEO during QuadrigaCX's operation, including four laptops, four phones, and three encrypted USB keys. EY also stated that they are working with some third-party payment processors to unlock the exchange's fiat balances, with no substantial progress made so far.

6. Reddit Users Discover Five Wallet Addresses of QuadrigaCX Exchange

Reddit user Decoze discovered five addresses related to the QuadrigaCX exchange, which received multiple small transfers totaling 104.335 Bitcoins on February 6th, almost matching the amount mentioned in the EY report. These addresses have had no transactions since April 2018 and are identified as associated with QuadrigaCX.

7. QuadrigaCX Transfers All Bitcoin and Ethereum to EY

All Bitcoin and Ethereum held by QuadrigaCX were instructed to be sent to court-appointed monitor Ernst & Young. On February 21st, EY confirmed that as expected, they have transferred the funds from QuadrigaCX's accounts to their own cold wallets, totaling 51 Bitcoins, 33 Bitcoin Cash, 2,000 Bitcoin Gold, 822 Litecoin, and 951 Ethereum. The report adds that the monitor will retain the cryptocurrencies in cold storage, awaiting further court orders.

8. QuadrigaCX Operator Faces Financial Strain During Restructuring

According to a report by Bloomberg, the company overseeing the process stated that without funds obtained from banks and payment processors, Quadriga Fintech Solutions Corp. faces a shortage of cash to carry out its restructuring.

In the report dated February 20th, it was mentioned that temporary funding provided by Jennifer Robertson, the widow of QuadrigaCX founder and CEO Gerald Cotten, is expected to run out shortly, and the applicant currently has no funds available for the Companies' Creditors Arrangement Act (CCAA) proceedings. EY identified three "direct funding sources" that could be used to finance court proceedings, urging bank drafts to be "deposited promptly to provide funds for the CCAA process and ultimately distribute to creditors."

9. EY Report: Six Independent Crypto Wallets Identified for QuadrigaCX

On March 1st, EY released the third monitor report in QuadrigaCX's creditor protection process in Canada.

The report indicates that EY has identified six separate crypto wallets primarily used for storing Bitcoin, the most commonly used cryptocurrency on the platform. Apart from an inadvertent Bitcoin transaction amounting to nearly half a million USD since April 2018, these wallets have had no deposits.

April 2019, QuadrigaCX Officially Enters Bankruptcy Proceedings

On April 8th, Justice Michael Wood of the Nova Scotia Supreme Court ruled that QuadrigaCX will transition into bankruptcy in the coming days, marking the conversion from its previously filed creditor protection to bankruptcy. With the entry into bankruptcy, EY becomes the trustee of the exchange, gaining more extensive investigative powers over the missing funds and allowing for the sale of its trading platform and other assets to generate some revenue.

May 2019, EY Report: QuadrigaCX Has $21 Million in Assets, Owes $160 Million in Debt

An EY report released on May 1st reveals that QuadrigaCX currently has assets totaling $21 million, but owes creditors $160 million. The report lists three corporate entities linked to QuadrigaCX—Quadriga Fintech Solutions Corp., Whiteside Capital Corporation, and 0984750 BC Ltd, each appearing as bankrupt companies.

December 2019, QuadrigaCX Creditors Demand Proof of Former CEO's Death

In December 2019, creditors of QuadrigaCX requested evidence of the former CEO Gerald Cotten's death. Law firm Miller Thomson wrote to the Royal Canadian Mounted Police (RCMP) on behalf of affected users, requesting authorities to exhume and perform an autopsy on Cotten's body to confirm his identity and cause of death.

Concern 1: Is Gerald Cotten Really Deceased?

Many in the crypto community speculate that Gerald Cotten may have faked his death, prompting calls for exhumation to verify his demise.

As mentioned earlier, QuadrigaCX creditors have requested the RCMP to provide evidence of the former CEO's death, with no response as of yet.

A group called "Quadriga Uncovered" with over 500 members, many of whom are creditors, utilize the group to discuss the details of the claims process and share insights and strategies about the case.

Many creditors are still skeptical about Gerald Cotten's reported death, with some suggesting long-term monitoring of his relatives to trace the source of funds.

Concern 2: How Long Will the Case Take?

According to lawyer Evan Thomas, it could take several years for victims to receive compensation from the collapsed crypto exchange. He mentioned that Mt. Gox is now