One of Canada's largest cryptocurrency exchanges has filed for creditor protection in Nova Scotia, leaving thousands of fearful customers with frozen assets and scant information.

This comes in the wake of financial and legal troubles with the five-year-old B.C.-based exchange platform — and news that its 30-year old founder, Gerald Cotten, died unexpectedly last December in India.

On Jan. 31, QuadrigaCX announced it had filed an application in the Supreme Court of Nova Scotia for creditor protection, after months of transaction delays.

Cryptocurrency leaders were shaken.

The volatile industry is already plagued by a lack of consumer confidence, said Dean Skurka, a vice president at Bitbuy.ca, a platform for buying virtual currency.

"This really highlights the need for the government to take action and regulate cryptocurrency exchanges," Skurka said in an interview from Toronto.

Bitbuy.ca president Adam Goldman said he met Cotten, Quadriga's founder, years ago in Toronto at the launch of the first bitcoin ATM.

"He was a quiet, serious guy with big plans ...an honest guy," he said.

Skurka said he was saddened to hear the company had devolved into a tailspin, and then tragedy.

Digital currency experts say news of troubles at Canadian-cryptocurrency platform QuadrigaCX is shaking confidence in the emerging industry. (Gillian Flaccus/Associated Press)

Frozen funds

Troubles began when CIBC took legal action and froze almost $26-million of Quadriga's funds in early 2018.

According to court documents, the bank alleged that money from 465 deposits was held in accounts belonging to the exchange's payment processor, Costodian Inc., and owner Jose Reyes.

The bank alleged it was unable to determine who the money belonged to and began investigating.

Then, early this year, a post appeared explaining that on Dec. 9, Cotten had died while working in an orphanage in India.

Global Affairs Canada confirmed that a Canadian had died in India and they had provided assistance to the family but, under the Privacy Act, could offer no more.

Encrypted laptop

In an affidavit filed in B.C. Supreme Court as part of probate proceedings on Jan. 31, Cotten's widow, Jennifer Robertson, described trying to cope with corporate issues after Cotten's death.

She described people posting inaccurate speculation on social media about "whether he is really dead."

The affidavit said Robertson was left searching the couple's Nova Scotia home and Cotten's encrypted laptop for business records and missing coins.

Digital currency like bitcoin and ethereum are not real coins. They only exist online and fears that $70-million worth of deposits might be inaccessible make Quadriga clients nervous. (Rick Bowmer/Associated Press)

She described hiring a security expert to help recover information about the Quadriga Fintech Solutions Corp. and several other associated companies Cotten had registered in B.C.

She said Cotten's companies had more than 115-thousand clients who had invested assets worth $70-million, which she estimates had grown to $250-million by December 2018.

As executor of Cotten's estate and owner of 43 per cent of the company's shares, Robertson filed a petition in civil court in B.C. on Jan. 22 describing a "rare and exceptional situation."

It said the company was left with no officers, directors or office space.

"Most of the business was being conducted by Gerry wherever he and his computer were located."

And then there were the locked digital wallets.

The wallets

Any user who wants to transfer bitcoin requires a wallet — located on a server.

So-called hot wallets are for live transactions — while so-called cold wallets are for storage to keep coins safe from hackers.

Robertson's affidavit says that assets tallied in those wallets show that Quadriga owes clients approximately $250-million as of Dec. 17, 2018.

But court documents say the company can only access "hot" wallets at this time.

Troubles blamed on banks

Nearly a year before Cotten died in December 2018, the company had legal trouble.

In January of that year, CIBC froze $26-million-worth of assets after finding irregularities with payment processing.

A 2018 Ontario Superior Court of Justice document says $67-million worth of transactions ended up improperly transferred into the personal account of Costodian Inc, the payment processor.

But Quadriga alleged the bank was wrong and only targeted the exchange because of mistrust of virtual currencies and called fears "that there must be shady dealings afoot" offensive and unsubstantiated.

Clients frustrated

All this caused delays.

Elvis Cavalic of Calgary said that he bought a few hundred dollars of bitcoin using Quadriga's platform.

When he tried to withdraw $15,000 in his account in October, he could not.

"This is a tough lesson learned. I would probably avoid [cryptocurrency] in the future," said Cavalic.

'"They've left us completely in the dark. I'm kind of preparing for the worst."

CBC reached out to lawyers for CIBC and Robertson for comment but did not receive a response by deadline.