QuadrigaCX had a long and successful run as Canada’s top Bitcoin exchange. Former counsel to the exchange, Christine Duhaime, says in a blog post at Coindesk that the company was among the only exchanges to publicly publish audits or obtain cold storage insurance.
Both choices were laudable and rare among exchanges in 2015, when she was fired after six months of providing advice on regulatory issues. She says CEO Gerald Cotten wanted to move away from being a publicly listed company and shook out all the “law and order” types. She says the company is composed of four companies in total, and therefore four sets of shareholders have a stake in the assets of Quadriga.
Before her firm’s hiring by Quadriga, the company believed it had been inadvertently involved in a pump-and-dump scheme.
“It is my belief that the whole QuadrigaCX team came to believe that the company may have unwittingly become involved in a Vancouver pump-and-dump scheme. Whether it had been drawn into a pump-and-dump is not for me to say because it was before my time, but I can say that QuadrigaCX was run by tech geeks, who were competitive, ambitious and smart but who were unfamiliar with the capital markets ecosystem in Vancouver.”
Quadriga subsequently bought its way out of many shareholder agreements. At the same time, at least some shareholders never received a dollar.
“There were few shareholders left by the time we exited in early 2016, and the shareholder lists publicly available do not appear to be up-to-date. Three shareholders have recently told me that they have never received notice of any annual general meetings and didn’t receive so much as a $1 dividend from QuadrigaCX in three years, despite how profitable it appears to have been.”
To take the company completely private, Cotten eliminated everyone related to compliance or regulatory oversight. In this way, Duhaime says, the company moved from being as regulated as possible to “lawlessness” in the regulatory sense.
“From that moment onwards, Mr. Cotten solely took over QuadrigaCX and operated the exchange as if it had no investors, no shareholders, no regulatory agencies and no law that applied to it – no corporate law, no securities law, no anti-money-laundering law and no contract law. I don’t know why Mr. Cotten decided to eschew regulatory law but I never spoke with him after that day. “
As CCN has previously reported, Cotten himself controlled the majority of the exchange’s crypto wallets. It was this fatal flaw in the security model that enabled an alleged massive loss of funds after his death in December 2018. Over $250 million (CAD) in outstanding claims by over 110,000 people exist against Quadriga, and its former lawyer wonders why certain legal actions have yet to be taken to ensure that whatever funds left are protected. She writes:
“I don’t know if there is $137 million parked in a few wallets; I don’t know why the bitcoin addresses that were supposed to be holding $92.3 million turned up empty; I don’t know why the wallet address holding $44.7 million of other cryptos can’t be disclosed; I don’t know why no law firm has applied for a Mareva injunction to preserve assets; I don’t know why the litigation is in Nova Scotia when British Columbia Courts have jurisdiction and the witnesses and evidence are in British Columbia […]”
Duhaime says she was reluctant to author a blog post on the subject of QuadrigaCX, but hopes doing so will raise awareness around the need for better exchange regulation. She did it because “customer assets held by exchanges must be subject to greater regulation and oversight, and unless we improve the accuracy of the available information […] ”
The final resolution of QuadrigaCX may take years to settle out. Thus far, it seems to be a more curious version of Mt. Gox, with greater intrigues surrounding the founder and his death. Following the news of his death and the lack of access to funds, some people believed the founder faked his death. Moreover, it has come to light that Gerald Cotten used his personal wealth to keep the exchange afloat and make customers whole while exchange was fighting with a large Canadian bank over its account.
The story of QuadrigaCX and other centralized exchanges that have suddenly been unable to service withdrawals should not be taken lightly. It illustrates the need for decentralized exchanges or at the very least solutions like Arwen, which enables clients and exchanges to split custody of funds while trading and ultimately prevents bad actors from stealing funds.