Bitcoin Exchange

$136 Million Potentially Gone After Cryptocurrency Exchange CEO Suddenly Dies

Millions in Investor Funds are Stuck In Cold Storage After QuadrigaCX CEO Death — Or Are They?

File this unusual case under "why you should always have a backup plan" and "there's always more than meets the eye." Gerald Cotten, a Canadian entrepreneur, CEO and co-founder of one of the country's biggest cryptocurrency exchanges, QuadrigaCX, passed due to complications from Crohn's Disease while traveling in India in December. As if the death of the exchange's CEO was not unfortunate enough, additional difficulty was added to the mix after it was revealed that he was the only one with access to wallets holding millions in client funds for the cryptocurrency exchange. Now, new independent analysis indicates that the funds may not actually be stuck, but may have never been there to begin with.

The Backstory

According to the company, QuadrigaCX stored many of the digital currencies offline in cold storage as a way of insulating themselves from hackers. While cold storage is an important precaution to ensure the security of large amounts of cryptocurrencies, it's equally important for the right people to be able to access the wallets for just such an event.  

After revealing the CEO's death to the public, Cotten's widow drew a lot of attention to the exchange by seeking legal protection from creditors for 30 days as the Vancouver-based exchange looks to sort things out. Jennifer Robertson, Cotten's wife, submitted an affidavit with the Supreme Court of Nova Scotia stating that Gerald Cotten, her husband, was the only person with access to the crypto assets stored offline. Specifically, the funds are said to be stored on an encrypted laptop that only Gerald Cotten had access to as he worked mostly from home.

On the surface level, this story looks to be a classic tale of not having the proper backup procedures implemented, especially for a company handling so much money. However, now analysts and researchers think there may be more to the story.

Funds Stuck, or Never There at All?

Here's where the story goes from unfortunate to more suspicious. Once the ordeals of QuadrigaCX were made public, others besides the exchange's clients became interested in the case — and not everyone is convinced. According to an initial report from The Wall Street Journal, two independent researchers say that client funds may actually be gone, not trapped at all.

One of those researchers is Zerononcense's James Edwards who reviewed QuadrigaCX's claims and looked to verify them with public ledger transactions. According to Edwards, "It appears that there are no identifiable cold wallet reserves for QuadrigaCX."

Edwards compiled data from more than 50 QuadrigaCX clients and analyzed transactions to get a picture of Quadriga's flow of funds. After following transactions, Edwards could only identify active accounts (i.e. "hot wallets") but couldn't find anything resembling reserve accounts that Quadriga claims to have.

"None of the withdrawal addresses provided by customers led to a wallet that could be considered anything comparable to a 'reserve' wallet."

For the time being, there is no conclusive evidence either way as clients are still left without access to their funds totalling C$250 million with only around C$70 million in fiat and roughly C$180 million (or $136 million USD) in cryptocurrencies. Blockchain proponents urge the QuadrigaCX team to release the wallet addresses of the alleged cold storage accounts so that the existence of said storage can be verified, but so far there have been no releases.

Cryptocurrency Markets

BTC/USD chart via eToro

Maintaining a similar momentum from the close of 2018, digital assets like Bitcoin and other cryptocurrencies have been in a slump since the beginning of 2019. As is typically the case with the markets, there are a variety of factors that contribute to price movement. However, analysts can't help but note the impact events like Quadriga's situation have on public perception of the cryptosphere. Indeed, past exchange compromises have had similar effects from the likes of Coincheck and Mt. Gox. Yet, with the cryptocurrency industry continuing to mature and institute more safeguards in the larger, more experienced exchanges, the current climate poses an enticing entry point on the horizon for investors. In fact, analysts say Bitcoin hasn't been this oversold in 4 years.

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