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Canadian cryptocurrency exchange is in hot water.
Disclaimer: this article was updated on Feb. 6 to include the results of the hearing at Nova Scotia Supreme Court, where QuadrigaCXâs CCAA application was reviewed.
Canadian cryptocurrency exchange QuadrigaCX is in hot water: Following the sudden death of its 30-year-old founder, Gerald Cotten, the exchange has allegedly lost access to its cold wallets, where most of the funds were stored.
Now, the exchange has taken to court to avoid the collapse, but some community members suggest that QuadrigaCXâs cold wallets never existed.
has been granted an order for creditor protection in the Nova Scotia Supreme Court. Justice Michael Wood gave the exchange a 30-day stay of proceedings â which will end on March 7 â to search for the missing funds. Quadrigaâs lawyers are considering selling the platform if the assets arenât found by that time.
The court has also appointed auditing firm Ernst & Young as the monitor. The company has already posted a notice to creditors on the QuadrigaCX subbreddit as part of the CCAA order, providing them with information about the proceedings and a general inquiry email. However, the email address is not valid, some users wrote.
Cottenâs wife and executor of estate, Jennifer Robertson, did not attend the hearing at the Nova Scotia Supreme Court, where Quadirgaâs CCAA application was reviewed, because of security concerns, according to Jack Julian, a CBC journalist who was present there.
Court documents cited by The Globe and Mail show that Cotten filed a will on Nov. 27, just 12 days before his death, leaving Robertson all his assets, which included properties in Nova Scotia and in British Columbia, a 2017 Lexus, an airplane, a yacht and two of his pet chihuahuas, along with $100,000 for their care. An alleged copy of Cottenâs death certificate, issued by the Indian government, recently surfaced online. The document still raised some concerns among Reddit users, who noted that Cottenâs surname was misspelled.
Cotten's laptop will now be given to lawyers representing the creditors. Eventually, it will be passed over to Ernst & Young, the court-appointed monitor. Julian from CBC wrote on his Twitter that the device was previously held by QuadrigaCX representatives.
Canada's largest crypto exchange with a complex history
QuadrigaCX was launched in December 2013 and operated from Vancouver, British Columbia. The digital assets exchange was founded by Gerald Cotten and Michael Patryn. Prior to that, Cotten was a director at the Vancouver Bitcoin Co-op, a voluntary association of local cryptocurrency enthusiasts, of which Patryn was also an active member.
According to Cotten, QuadrigaCX was established against the backdrop of scarce crypto services in Canada. In February 2015, he said on a Decentral Talk Live podcast:
âIt was just so hard to buy Bitcoin in Canada. You couldnât hook up your bank account anywhere. It was just such a challenge.â
In 2015, QuadrigaCX became the countryâs largest crypto exchange, with around $37.4 million traded on their platform â according to the company, it had acquired around 60 percent of the market share by November that year.
QuadrigaCX is also reportedly the first crypto platform in Canada to be granted a money services business (MSB) license from the Financial Transactions and Reports Analysis Centre (FinTRAC), the domestic financial regulator responsible for Anti-Money Laundering (AML) measures. As Cotten told Straight in a February 2014 interview, his exchange was focused on compliance:
âWeâre quite proactive when it comes to regulations. We donât want to break the law. We want to fully comply, and we actually more than comply with what the current laws are.â
Despite claiming to be a compliant company, QuadrigaCX doesnât have a public office. In February 2018, Reddit user u/Psychofig claimed that, after he checked out the address stated on the exchange's website â 223-2055 Commercial Drive, Vancouver BC â he discovered it was nonexistent. In response, the company said that they had an office before, but closed it down for the public due to security concerns:
âIts a PO [post office] box, just like our competitors. We could have a physical office where you could visit, but then we would risk being robbed like Canada Bitcoins.â
In March 2015, Quadriga Fintech â the exchangeâs parent company â announced its plans to go public and be listed on the Canadian Securities Exchange (CSE) via a reverse initial public offering (IPO). The firm reportedly planned to acquire a shell company called Whiteside Capital Corporation for that purpose. Â
Despite going through the easier route of a reverse IPO â which includes less paperwork â Quadriga Fintech still had to be audited. Cotten claimed at the time that he was âexcited to be able to provide an unparalleled level of transparency by merging legacy financial audits with innovative blockchain technology.â Â
There has been no update on the IPO plans from Quadriga since then, and the firm was never listed on the CSE. In May 2015, however, Patryn revealed that his company was selling over-the-counter (OTC) shares for Bitcoin (BTC).
In March 2016, the British Columbia Securities Commision (BCSC) barred QuadrigaCX from selling securities after slapping it with a cease trade order (CTO) for not submitting annual audited financial statements for the fiscal year that ended Oct. 31, 2015.
About a week before getting hit with the CTO, Quadrigaâs directors Anthony Milewski and Lovie Horner resigned. Then, soon after the order was issued, Bill Filtness, the director, and Natasha Tsai, the chief financial officer, also quit the company, leaving Patryn and Cotten as the only executives in Quadriga.
However, In March 2018, Quadrigaâs official Reddit account commented that Patryn was âan early [sic] who left the company more than two years ago.â Although that checks out with his LinkedIn account showing that he left the firm in February 2016, Patrynâs resignation from Quadriga was never announced. Reddit users have several times linked Patryn to a convicted money launderer named Omar Dhanani. Quadriga has denied this accusation, calling it ânonsenseâ.
Cotten highlighted security as one of the main priorities of his business. According to a CNBC article published in May 2014, QuadrigaCX held the majority of its assets in cold wallets â which are secured by digital security keys in order to protect them from hacking and theft â had advanced encryption, custom operating systems and software, and a partnership with CloudFlare, a large company in the United States that provides DDoS protection.
Nonetheless, Quadriga CX had experienced at least one major security breach in the past. In June 2017, the exchange announced that it had lost 67,317.25 ETH (around $14 million, at the time) due to a âtechnical glitch.â
Legal fight with the CIBC and Cottenâs sudden death
In 2018, the exchange entered a prolonged legal fight with the Canadian Imperial Bank of Commerce (CIBC). The bank reportedly froze five accounts belonging to Quadrigaâs payment processor, Costodian Inc., and its owner, Jose Reyes. Combined, they contained around $19.6 million, according to reports. The CIBC suspended the accounts after failing to identify the owner of those funds.
The CIBC requested the Ontario Superior Court to withhold the funds and determine whether they belong to Costodian, the exchange or the users who deposited the funds. Further, in November 2018, the court ruled in favor of the bank, agreeing that the owner of the funds was not clearly established. As a result, the CIBC was obliged to pass the funds over to the Accountant of the Superior Court in order to identify the owner of the money. Meanwhile, Quadriga users continued to actively report withdrawal issues, while massive complaints started to arise earlier in 2018.
On Jan. 14, 2019, Cottenâs wife, Jennifer Robertson, announced that her husband, CEO at Quadriga, has suddenly died. According to Robertsonâs statement, Cotten, who was 30 at the time, perished âdue to complications with Crohn's diseaseâ on Dec. 9, 2018 while travelling in India. Being Cottenâs estate executor, she also recommended to appoint Aaron Matthews, head of operations at Quadriga, as interim president and CEO.
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