Canadian cryptocurrency exchange QuadrigaCX was relatively unknown outside of Canada until its CEO, Gerald Cotton, died suddenly in December, while on a trip to India. That alone wouldn't necessarily have made headlines if the exchange's 115,000 users were able to conduct business as usual and access their digital assets—much of it in —once his death became public.

However, the exchange's statement announcing he'd passed away, released on January 14, 2019 by his widow, Jennifer Robertson, triggered investor requests to withdraw funds. That forced the revelation that Cotton had died without sharing the password for the exchange's cold wallets, leaving nearly CAD$200 million worth of cryptocurrency in limbo and inaccessible to users. Which is when crypto and other investors across the globe started paying attention.



In early February, Robertson, the executor of Cotton's estate which includes the exchange, filed for debt protection. The Nova Scotia Supreme Court is overseeing the exchange's case. Initially that seemed appropriate, since all funds appeared to be accounted for, just difficult to access. But additional discoveries since point to a far less benign, and possibly more criminal situation.

The court appointed big four accounting firm Ernst & Young as an independent third party to monitor the proceedings and to conduct a forensic audit of the exchange. After weeks of speculation, E&Y recently revealed that six cold storage wallets, which were supposed to have contained $137 million in funds, were empty. Additionally, according to E&Y, the wallets were cleaned out in April 2018. Another wrinkle: QuadrigaCX was also discovered to have apparently created more than a dozen fake accounts.

Red Flags Shouldn't Have Been Ignored



Since the scandalous collapse of the Mt. Gox exchange after it was hacked for a second time in 2014, the reputation of crypto exchanges as a whole has taken a beating. The numerous mysteries surrounding QaudrigaCX will likely tarnish the asset class and exchanges that trade them yet more.

Engadget calls this "the messiest Bitcoin saga yet." Crypto exchanges, and the regulations that govern them, are still in their nascent stages and despite numerous 'warnings,' unfortunately investors haven't always been focused on putting first. Conducting ones own due diligence—about both an exchange as well as its management—remains perhaps the most critical first step to successful investing, whether in digital currencies or more conventional assets.

There were already a number of red flags surrounding QuadrigaCX and its CEO. Going back more than a year, complaints from QuadrigaCX investors had surfaced that they sometimes had to wait weeks or even longer to withdraw funds, when transactions within the crypto space generally take minutes. More recently, questions continue as to the veracity of Cotton's death. Yet more bizarre, Canada's Globe and Mail, reported that Cotten was an ex-con who was jailed under another name.

Equally disturbing, Reuters reported that British Columbia's Securities Commission (BCSC), the province's securities watchdog commission, doesn't regulate QuadrigaCX, since it had never indicated "that it was trading in securities or derivatives" or that it operated as an exchange.

Yoav Dror, CEO of PumaPay, a blockchain payment solution says:

“QuadrigaCX’s unfortunate developments prove that we need regulations to protect investors against any potential cybercriminal activity or hackers lurking in the cryptocurrency world, but also from natural events or disasters that are an inescapable part of our reality. In order to cultivate trust in cryptocurrencies and innovative crypto-projects, we ought to push for measures that will safeguard the interests of all those who trust us and believe in the potential of cryptocurrencies.”

The main problem, says Alex Mashinsky, CEO of Celsius Network, with centralized exchanges is the lack of transparency surrounding management and the assets being managed.

“We need a new breed of companies focused on the depositors’ best interests instead of profit optimization. QuadrigaCX had very little transparency and completed limited development in the past few years which enabled hackers to take advantage of its vulnerabilities and steal its coins. If your provider is not issuing patches and updates at least once a month, you risk the same fate.”

The investigation into what actually happened at QuadrigaCX, and whether any of the assets under its management are recoverable is ongoing. Conspiracy theories abound. Phil Zamani, CEO and chairman of the board at Blocko, a Samsung-backed commercial blockchain provider, notes:

“There are many theories as to what actually happened in the QuadrigaCX debacle—from [the exchange] running fractional reserves, gambling with customer funds to win back losses incurred throughout the crypto winter, to the CEO faking his death and running away with millions of dollars owned by thousands of exchange customers. Nonetheless, the unfortunate event offers all of us valuable lessons including what is really possible when we trust central parties with our funds, especially in the wild west of crypto.”

Zamani believes the most important lesson should be learned by those who believe mainstream adoption of cryptocurrency as a payment system will happen. In his view this can only occur if crypto exchange customers are protected in much the same way as conventional banks protect depositors, so there's a chance of recovering lost or embezzled funds.