Quadriga: A Historic Crypto-Catastrophe

The Quadriga Mystery

QuadrigaCX is now in the world media spotlight as a result of the mysterious death of its CEO, Gerald Cotten. In early February, the company demanded protection from creditors, claiming it didn’t have access to cold wallets, the passwords to which were known by Gerald Cotton alone. The court granted the company 30 days of protection from lawsuits and selected EY as an independent observer, but it is already clear that Quadriga is waiting for a trial and a lawsuit from their clients.

In the course of testifying under oath, the wife of the late Gerald Cotten, Jennifer Robertson, confirmed that the firm holds $250 million Canadian (CAD) or $190 million in digital currency and fiat belonging to their clients. The amount of assets that were in cold and hot wallets is unknown. Robertson declared that a small amount of cryptocurrency was shifted to a hot wallet.

“Usually, Cotten relocated almost all coins to cold storage for better protection from hacker attacks,” she added. Based on her statements, it is now known that Cotten was “entirely responsible for managing user’s assets.”

“Quadriga cryptocurrency reserves are now unavailable, some of them may be lost,” Robertson wrote. She had Cotten’s laptop, but neither she nor the specialists were able to extract the information encrypted in it.

Robertson remarked that their clients continued to make deposits even after Cotten’s death, which were ultimately admitted. Some of these were automatic, but at least one user made a manual transfer. The founder’s wife does not know which percentage of the funds is stored in “hot” wallets, namely platforms that require constant connection to the network, and which deal in fiat mo. In addition, Robertson added, there is a chance that some of the crypto coins are stored in accounts on other sites.

The document ends with a petition to the court to exempt the exchange from other lawsuits that may be filed against it. Quadriga “urgently needs to be exempted from lawsuits, which will give it and its counterparts extra time to search for accessible digital assets and discuss the possibility of working with banks.” Robertson argues that otherwise, “many, if not all, clients of the exchange may suffer additional losses.”

Quadriga’s Money Funnel

It remains likely that some QuadrigaCX cryptocurrency assets are stored on third-party exchanges, but this information has not been confirmed. As the specialists of the analytical company Elementus Group found out, the Canadian cryptocurrency exchange QuadrigaCX, which supposedly lost access to its cold wallets with $190 million owned by customers, probably never had these wallets. Moreover, almost all of the 1.4 million Ethereum coins (more than $200 million at the current exchange rate), which, as stated by the exchange, were stored in cold Quadriga wallets, were actually sent to the online wallets of other firms and exchanges.

In addition, the Wall Street Journal reports that at least $35 million worth of Ethers was sent to a stock exchange suspected earlier of helping criminals launder money. The Ethers were then converted into Bitcoin and other cryptocurrencies, and shifted to other platforms, ending up in anonymous wallets. At least 268,000 Ethers were sent to ShapeShift AG, which is suspected of helping criminals to launder millions of dollars. The true owners of the wallets where users’ funds were placed is unknown, since ShapeShift made it possible to perform operations with cryptocurrencies anonymously until October 2018.

Is There a Solution?

There are not many QuadrigaCX clients in the cryptocurrency community, but the public is interested in this story as an indicator of the state of the industry and the mess it creates. Many users consider this case to be a vivid demonstration of why the field of cryptocurrency requires normal regulation. After keys on the laptops of dying CEOs, locked vaults, and non-payment of money, users believe the mess will not stop until regulators intervene and establish the normal rules of operation.

However, the Quadriga team is actively searching for a solution. Here is the official statement from their website: “Over the past weeks, we did huge work on solving our problems, trying to find and secure very significant stocks of cryptocurrency funds kept in cold wallets. These funds are necessary to maintain the balance of our clients’ accounts and resource support of financial organizations that accept our bank checks. Unfortunately, the search was not successful. Further reports will be published after the hearings.”

Andrew Zubko, CTO at Applicature, believes this problem would not have appeared if the exchange had been good at its job in the first place. The best decision for storing funds is to use multi-signatures and give data access to at least two people. For example, to implement a transaction, you need to specify three out of five signatures. And if other participants have access to wallets that were designed as multi-wallets, it means that if one of the participants dies, other participants can safely manage the funds. Of course, a solution can be found to any problem, but in this particular case, it can take a lot of time. The situation can be identified as improper storage of funds. Unfortunately, currently, no one can guarantee that the Quadriga clients will not lose their money.

There are some other interesting opinions among experts. For instance, Hisham Faouri, founder and CEO at Whispers, believes that even if nothing had happened to the founder, they should definitely have provided all the necessary solutions to protect the stored funds. One person cannot have access to everything without a backup plan. There must be certain organizational and management procedures in place. If a person with access keys to a huge amount of funds is missing, there always has to be someone who can do his job for him. So, we can say that one of the problems was poor internal management of the company.

There have been some studies done on this particular incident that reveal have it could have been solved. There is a form of human device interface that can implemented when a person passes away or loses control of something. The machine or computer acts/communicates with the user based on his/her response or absence of response. Anyone who has complete control over data and assets to which no one else has access must find a way to transfer ownership/possession rights to someone else in the event of such an incident.

We are talking here about a platform that can transfer and manage data and create a workflow that runs only if a particular user is not expected to respond. As an example, let’s say you have 100 Bitcoins stored in a secure online or offline wallet that nobody knows about. You can pass the seed for that wallet to your family automatically. This can be triggered if, for example, you don’t log into your Gmail or Facebook account for a week. A program can be connected to your Gmail or to any social media network and checks your activity online. You can set up multiple triggers: an email sent to you, an SMS to your relatives, publishing something on your Facebook, or deactivating your social media profile(s). Some companies are currently doing password management, will management, and estate management. Nowadays, there are wills being executed on the blockchain, which is safe and secure.

The user can assign many triggers to the platform. It can then transfer the passwords of somebody’s cryptocurrency inheritance to their family. This is one of the possible solutions that could have saved Quadriga from the unfortunate position it is in right now.

Kraken to the Rescue

The community has many questions about this strange story. Cotten passed away on December 9, so how did the QuadrigaCX cryptography market manage to work so long without access to cryptocurrency? What was the number of operating wallets replenished all this time? Why was the loss of keys unreported to the public for so long?

It appears that Kraken knows thousands of addresses of QuadrigaCX clients, and is offering to help with the investigation. The Kraken team published the following message:

“We’re offering a $100,000 reward for the discovery of Quadriga coins. Kraken will give this reward for information leading to significant progress or discovery of all or some of the missing client funds. It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”

Kraken has assembled a team of experts who will follow the transition of funds for known wallets and investigate the possibility of their return.

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