Coinbase CEO Brian Armstrong has been speculating on Twitter that QuadrigaCX used its founder’s death to obfuscate an earlier “multi-million dollar” loss of funds.

After much recent evidence pointing towards the lack of any identifiable cold crypto holdings linked to customer deposits or withdrawals, Armstrong suggests that this accidental exit scam was a result of things going wrong for the exchange a long time prior to the CEO’s death in late 2018.

Armstrong was quick to point out that his summary of findings was just a best guess, and went on to call it “pure speculation, nothing more.”

Wanted to share a summary of what we believe happened to QuadrigaCX. We did our own internal research, including some blockchain analytics, to see if we could help. Important to note that this is just our best guess. Take it as *pure speculation*, nothing more. — Brian Armstrong (@brian_armstrong) February 21, 2019

Under human control

Armstrong first confirmed that clusters that look like QuadrigaCX’s cold storage were controlled by someone (likely Cotten) manually. These balances were moved out by early 2018, said Armstrong.

He also mentions that QuadrigaCX is one of the oldest exchanges in existence, having been founded in 2013. If the exchange was pulling an “exit scam,” then “it likely would have been timed better,” according to the Coinbase CEO.

Armstrong noted that QuadrigaCX suffered a multi-million dollar bug in June 2017, that came from a smart contract error while sweeping (the automated process of transferring funds between accounts) ETH to the exchange’s hot wallet.

Reasons for the glitch were due to the exchange not updating its code properly (when Ethereum’s Geth software was updated). This error resulted in funds becoming permanently trapped in an invalid contract. Following the incident, the exchange released a statement saying:

“While this issue poses a setback to QuadrigaCX, and has unfortunately eaten into our profits substantially, it will have no impact on account funding or withdrawals and will have no impact on the day to day operation of the exchange.”

‘Trading their way out of a hole’

Based on Armstrong’s and Coinbase’s research, this is when “patterns of sends from cold storage suggest they tried keeping the exchange afloat.” He even goes as far as to say that perhaps QuadrigaCX attempted to “trade their way out of a hole,” suggesting that the exchange participated in risky cryptocurrency trading using customer funds.

Armstrong then said that the 2018 bear market may have “dried out” the exchange’s liquidity and may have even caused the earlier loss of funds to “catch up” with them. He goes on to speculate that the exchange did not have enough assets to cover customer deposits as a result of the hack, and some insiders were aware of this fact.

Fractional reserves

Armstrong also claimed that “at least a few people inside QuadrigaCX must have known that it was running fractional [reserves]. If so, then it’s possible that the untimely death of their CEO was used as an outlet to let the company sink.”

In summary, the Coinbase CEO suggests that Cotten’s death was used as a potential cover for the earlier loss of funds, saying: “Management decided to cut losses and release a statement claiming that access to money was lost with the CEO’s death.”

“While this story isn’t perfect, it does seem plausible,” concluded Armstrong.