How Gerald Cotten built QuadrigaCX
AND THE ENSUING CRYPTOCURRENCY STORM
Before his death made headlines worldwide, Gerald Cotten had just been a 30-year-old guy dabbling in digital finance. And when Cotten, the founder of QuadrigaCX, which now owes more than $260 million in cash and cryptocurrency to thousands of people, first turned his focus to Bitcoin, he found there weren’t many ways to buy the cryptocurrency in Canada.
“If you recall, back in the summer of 2013, there really weren’t many options here in Canada for people to buy and sell bitcoins,” Cotten said during a 2015 interview on Decentral Talk Live, an online show about cryptocurrency. A clip of the interview still exists on YouTube.
“There was one exchange that was pretty much leading the pack,” Cotten said. “And then other than that you pretty much had to send a wire over to Japan, if you wanted to buy bitcoin.”
Wearing a grey T-shirt and jeans, rounded-butrectangular glasses, and with a smartphone to his right, Cotten told his interviewers that Canada had a number of hurdles in the way of wouldbe bitcoin buyers.
“You couldn’t hook up your bank account anywhere, it was just such a challenge,” he said, with a smile sometimes spreading across his face during the interview.
This was an area of expertise for Cotten, who said he had already set up some things in terms of banking and payment processing.
“So really, it was just a matter of setting up an exchange, and then integrating that with everything that I had previously built up in that sort of industry,” he said.
Four months of work later, QuadrigaCX launched on Boxing Day 2013. Users began to flock to the site.
According to a November 2015 financial filing, Quadriga estimated at that point it was processing between 60 to 90 per cent of the volume of digital currency exchange transactions in Canada.
“Because there were so few options in Canada, we ended up getting a lot of clients right away,” the then-26year-old Cotten said.
The popularity of Quadriga’s cryptocurrency exchange is now a burden on the company, which has been forced into creditor protection in the wake of Cotten’s death in India in December.
According to court documents, there are 92,000 or so users to which Quadriga owes more than $260 million in cash and cryptocurrency.
Cotten had been responsible for handling funds for Quadriga, and the CEO left behind a password-protected laptop and USB key that no one has been able to crack. The whole situation has raised a lot of questions, including about Cotten himself.
Christine Duhaime, a Canadian lawyer and certified financial crime and antimoney laundering specialist, worked with Quadriga back in 2015 as the company was trying to launch Canada’s first research and development lab for the blockchain.
“Looking back, I don’t know that anybody knew anything about the inside of Quadriga,” said Duhaime. “When I read that affidavit (from Jennifer Robertson, Cotten’s widow), I was like: ‘Oh, he was in Nova Scotia? I thought he was in Toronto.’ ”
There’s also Cotten’s will, filed 12 days before his death, which lists his assets, such as properties in Nova Scotia and British Columbia, a Lexus, an airplane, and a boat. Speculation has even arisen about whether or not the CEO is actually dead.
“There has been a significant amount of commentary on Reddit and other webbased platforms about the state of Quadriga, Gerry’s death (including whether he is really dead) and missing coins,” Robertson said in an affidavit.
What we do know about Cotten, through court documents, public securities filings and people who knew him, is that he was a nice guy who became interested in digital money at a young age.
Gerald William Cotten was born on May 11, 1988.
He started building his expertise in digital finance in his teens and graduated with a Bachelor of Business Administration degree in 2010 from York University’s Schulich School of Business in Toronto.
“Mr. Cotten has been involved with digital payments and digital forms of currency and transfers of electronic value for over 10 years and began his career in this area at a young age,” a November 2015 prospectus for Quadriga’s parent company said. “He has spoken at financial technology conferences and is an advisor for an international consortium that certifies C4 (the CryptoCurrency Certification Consortium).”
According to an earlier prospectus, that same crypto-consortium had certified Cotten as a Bitcoin professional. The designation, the consortium says, means a person is “knowledgeable about the Bitcoin blockchain, Bitcoin transactions, and how the Bitcoin network operates.”
“CBPs (Certified Bitcoin Professionals) are able to apply Bitcoin technology to their professional area of expertise and understand privacy aspects, doublespending, and other issues that relate to the currency,” the consortium says.
In the early parts of this decade, Cotten was living in Vancouver, where Quadriga had been based. He also moved in a circle of people interested in Bitcoin and blockchain, the technology that supports the digital currency.
It was the place to be for cryptocurrency enthusiasts. Hippies had Haight-Ashbury, the Beats had Greenwich Village and Bitcoinlovers had Vancouver.
In 2013, the world’s first bitcoin ATM opened in the city. But even prior to that, a group of people had been having regular meetups in Vancouver to talk Bitcoin and otherwise. The gatherings allowed people to come and learn about digital coins, to talk about Bitcoin and how to get more businesses using it.
Vancouver’s Bitcoin Co-op was founded in 2012, created out of a group of regulars at the meetups. Quadriga had rented office space in the Gastown part of Vancouver, which had hosted the weekly co-op meetings “where Digital Currency enthusiasts from around Greater Vancouver met in order to discuss new ideas.”
(The co-op also, a memorandum of association said, aimed to “work with its members and the community to bring peace and prosperity to the world by developing and raising awareness of solutions that promote resilience and liberty.”)
Freddie Heartline, a member of the Vancouver-co-op, knew Cotten, and called him a “sunny ways guy, like Justin Trudeau.”
“He was super competent and super smart,” Heartline said.
Cotten described the scene in an article by Market One Media Group, noting that the talk had gone from being very technical to more about using bitcoin in business and everyday life.
“Now up to 65 people from a wide spectrum of areas come to the meetings, including professionals, investors, merchants and consumers,” Cotten is quoted as saying. “A month ago a 78-year-old woman showed up wanting to learn more. That just shows there’s been a huge shift in recognition and interest in bitcoins.”
There had been a hope to take Quadriga public at some point, according to Robertson’s affidavit. The April 2015 prospectus noted that two Canadian bitcoin exchanges had recently closed, a development that “led to greater market potential as well as greater consumer reluctance in the industry.”
The company never went public. Then, in early 2016, all the other directors of Quadriga resigned and the British Columbia Securities Commission issued a ceasetrade order on the parent company’s stock. Robertson said she was advised by the company’s lawyers that this was over a “failure to file disclosure documents, such as financial statements.”
Cotten was left as the sole officer of the company, albeit not the only employee or owner. The way Cotten ran Quadriga, however, was very hands-on, with the CEO conducting much of the company’s recent operations from the home he shared with his wife in Nova Scotia.
Adam Soltys, who had been part of the Vancouver co-op, said Cotten had “always been super responsive and helpful” in the past, such as when Soltys wanted to withdraw bitcoins to buy a house.
“He (Cotten) was in touch with me personally, he helped make sure that the transfer went through on time,” Soltys said. “And when the wire was taking a long time, then he actually went out of his way to go and do a direct deposit at the bank for me so I could get the money.”
It is that personal approach, however, that has created problems now. Cotten died on Dec. 9, 2018 in Jaipur, India, a statement of death from a Halifax funeral home says. His death, his widow said, was due to complications from Crohn’s disease.
A statement from the company said Cotten had been opening an orphanage in India.
“Gerry cared deeply about honesty and transparency — values he lived by in both his professional and personal life,” the statement said. “He was hardworking and passionate, with an unwavering commitment to his customers, employees, and family.”
Asked by the Post about Quadriga and Cotten, a spokesperson for Global Affairs Canada said: “Our thoughts and sympathies are with the loved ones of a Canadian who died while visiting India.”
“We provided assistance to the family during this very difficult time,” they added, without mentioning Cotten by name. “Due to the provisions of the Privacy Act, no further information can be disclosed.”
Now Soltys, like others, is out cash or cryptocurrency or both in the wake of Cotten’s death and the shutdown of its website late last month. In Soltys’ case, he is trying to recover around $70,000.
“I’m going to be hoping to get some of it back, but it’s not looking too good,” he said.
Quadriga’s monitor, Ernst & Young, wrote in a pre-filing report that Cotten had been primarily responsible for running the company and had a “significant amount of institutional knowledge” about its trading business.
“With Mr. Cotten’s passing,” the monitor added, “Quadriga did not have the proper governance to manage the business.”
Quadriga says it has run into liquidity problems, and had been trying, unsuccessfully, to locate cryptocurrency reserves held in cold storage in order to meet the balances owed to its customers.
“Cold wallets, by their nature, are highly encrypted and were kept off the QuadrigaCX server for security reasons,” Quadriga said on its website. “Gerry took sole responsibility for the handling of funds for QuadrigaCX and as such no one other than him can access the coins in the cold wallets.”
Cotten and Quadriga had also run into issues with Canadian Imperial Bank of Commerce, which froze accounts of a payment processor used by Quadriga.
Robertson’s affidavit said the litigation ultimately determined that $25.7 million belonged, mostly, to Quadriga. The company’s payment processor has not been able to find a financial institution to accept the drafts.
“The litigation with CIBC had a significant impact on Quadriga’s ability to operate and to ensure users of the Quadriga platform were kept whole,” Robertson’s affidavit said. “Gerry told me that he was advancing his own personal funds in order to ensure that payments were being made to Quadriga users.”
The extraordinary crisis at Quadriga has shaken the public’s faith, again, in cryptocurrency.
“Unfortunately, the news about QuadrigaCX is yet another ‘stain’ on the industry as a whole,” Canadian crypto-company Coinsquare said in a press release this week. The same release stated that “the issues faced by QuadrigaCX are not issues at Coinsquare.”
But Heartline is optimistic there will be a positive outcome from the process, which has ensnared Quadriga and its users.
Cotten was a pilot and someone who focused on details and planned ahead, Heartline said. His business was taking in millions, and cryptocurrency is very liquid, so he had to take care.
“He was not an evil dude,” Heartline added. “He was careful and pragmatic.”
Robertson’s affidavit also said that the company would look at all the options available to it to pay users what they are owed, including a sale of the trading platform.
Any outcome could still be a ways off, however.
“I think we’re in the third inning of this game of ‘Where’s the f--king money, Gerald?’ ” Heartline said.