A crypto-mystery: Is $140M stuck or missing?
Researchers aren’t sure customer holdings are locked in vault
A Canadian cryptocurrency exchange says about $140 million (U.S.) worth of customers’ holdings are stuck in an electronic vault because the company’s founder, and sole employee, died without sharing the password.
But two independent researchers say publicly available transaction records associated with QuadrigaCX suggest the money may be gone, not trapped.
They say it appears Quadriga transferred customer funds to other cryptocurrency exchanges, although it isn’t clear what might have happened to the money from there.
Their research is the latest twist in what is shaping up to be a bizarre case, even within the often murky and unpredictable world of cryptocurrencies.
Gerald Cotten launched Quadriga in December 2013. The exchange claimed to be one of the largest in Canada, allowing customers to trade a handful of cryptocurrencies, including bitcoin and ether.
On Jan. 15, the company announced on its website that Mr. Cotten had died on Dec. 9 from complications related to Crohn’s disease while building an orphanage in India. He was 30 years old. Two weeks later, the exchange filed for bankruptcy protection in a Nova Scotia court.
Quadriga said its customers have accounts with a total balance of about C$250 million. Only about C$70 million of those customer funds is in cash. About C$180 million, or about $140 million, is in cryptocurrencies held in a reserve account maintained on Mr. Cotten’s laptop, the company said in its bankruptcy filing. Quadriga would need control of that account to send
those cryptocurrency funds to customers.
Mr. Cotten ran the business out of his home in Fall River, Nova Scotia, his widow, Jennifer Robertson, stated in an affidavit. Ms. Robertson said Mr. Cotten was the only person who moved funds from an active account—called a “hot wallet” in crypto circles because it is connected to the internet—to the reserve account, which is an offline “cold wallet.” The company said it has been unable to break into Mr. Cotten’s laptop to try to recover the access keys.
If the laptop can’t be accessed, the funds could be permanently frozen. On Tuesday, a judge in the Supreme Court of Nova Scotia granted the company a 30-day stay of proceedings as it tries to untangle its finances.
There are no standards or regulations in the cryptocurrency world that would prevent a situation such as at Quadriga, where one person runs an exchange that handles millions of dollars in virtual currencies using a laptop computer, and has sole access to crucial passwords.
Some cryptocurrency specialists aren’t waiting for Quadriga to figure things out. James Edwards, a cryptocurrency analyst who publishes research on a website called Zerononcense, said he reviewed the exchange’s claims based on an examination of publicly available transaction histories.
He says he found no evidence that Quadriga controlled any wallets that held the large amounts the company claims. “It appears that there are no identifiable cold wallet reserves for QuadrigaCX,” he wrote in a report. Quadriga didn’t respond to a request for comment.
The analysis Mr. Edwards performed is possible because bitcoin and other virtual currencies have publicly available digital records that allow anybody to trace the entire transaction history of a specific currency. This type of forensic analysis has become more common over the past few years in the cryptocurrency world.
Mr. Edwards collected information from more than 50 Quadriga clients and then performed an analysis of those transactions, drawing a picture of Quadriga’s money flows. Transactions from the customers to Quadriga revealed the existence of its active accounts. But Mr. Edwards couldn’t find any transactions going to the kinds of reserve accounts Quadriga says it has.
If the reserve accounts existed, Mr. Edwards said, then at some point transactions either to or from the active accounts should have appeared.
“None of the withdrawal addresses provided by customers led to a wallet that could be considered anything comparable to a ‘reserve’ wallet,” Mr. Edwards wrote. Mr. Edwards told The Wall Street Journal there was evidence wallets once existed that had larger balances, but those balances were currently much lower. The largest wallet currently, he said, appeared to be the hot wallet, or the one used for transactional purposes.
The exchange appeared to be satisfying withdrawal requests from the hot wallet, he said, but only after enough new deposits came in from other customers to cover the withdrawals.
Mr. Edwards focused mostly on Quadriga’s bitcoin holdings. Another analytics firm, Elementus Group, traced the exchange’s ether holdings, and came to the same conclusion.
“It is extremely likely that there aren’t any cold wallets,” CEO Max Galka told the Journal. Most of the funds appeared to be going out to other exchanges, he said, including Bitfinex, Poloniex, and ShapeShift.
Poloniex said it identified accounts that could be related to Quadriga, and is working with appropriate authorities. Bitfinex did not immediately reply to a request for comment. ShapeShift declined to comment.
Jesse Powell, the CEO of online exchange Kraken, also doubted Quadriga’s claims. He said on Twitter Sunday that his exchange had wallets known to belong to Quadriga and was investigating the “bizarre” story. He suggested the Royal Canadian Mounted Police contact him. Mr. Powell declined to comment.
The researchers’ analysis isn’t conclusive, though. “In my opinion, that’s an impossibility to determine,” said David Jevans, the CEO of CipherTrace, another firm that does analytics in the sector. It is possible Quadriga had a number of accounts that served as cold wallets, rather than one, which wouldn’t have shown up in the searches of Mr. Edwards and others. “It very well could be they took the money, moved it out to the cold wallets, and tragedy happened,” he said.
While those suspicious of Quadriga acknowledge the public transactions don’t provide certainty, some say there is a way to determine if the exchange’s money is indeed trapped. A crypto developer named Amaury Sechet suggested Quadriga should publish the addresses of the cold wallets. This would allow anyone to see how much cryptocurrency is in them, even if they couldn’t access it.
Poloniex said it identified accounts that could be related to Quadriga, and is working with appropriate authorities. Bitfinex did not immediately reply to a request for comment. ShapeShift declined to comment.
“Over time trust will build as the coins remains (sic) untouched,” he wrote on Twitter. “If they cannot do this, their story is not credible.”