QuadrigaCX was a Canadian cryptocurrency exchange founded in 2013 by Gerald Cotten. It gained popularity as one of the largest cryptocurrency exchanges in Canada, allowing users to trade Bitcoin, Ethereum, and other cryptocurrencies.
risis and Inaccessible Funds
In early 2019, QuadrigaCX faced a significant crisis when it was revealed that the exchange was unable to access its customers' funds. The primary reason for this was the unexpected death of Gerald Cotten, the CEO of QuadrigaCX, in December 2018. Cotten was reported to be the only person with access to the private keys necessary to access the exchange's cold wallets, where the majority of customer funds were stored.
As a result, an estimated CAD 190 million (approximately USD 145 million) worth of cryptocurrencies became inaccessible to QuadrigaCX customers. The funds were locked in the cold wallets, and efforts to recover or access them were unsuccessful.
Irregularities and Mismanagement
The subsequent investigation into QuadrigaCX revealed several irregularities and mismanagement within the exchange. Some notable findings include:
Lack of Cold Wallet Reserves: It was discovered that QuadrigaCX had a significant shortfall in its cryptocurrency reserves. The exchange had been operating as a fractional reserve, meaning it did not hold sufficient funds to cover the customer deposits.
Ponzi Scheme Allegations: Evidence emerged that QuadrigaCX was operating as a Ponzi scheme, using new deposits to pay out withdrawal requests. This raised concerns about the sustainability of the exchange's operations.
Misappropriation of Funds: There were allegations that Gerald Cotten misappropriated customer funds for personal use. Reports suggested that he used customer funds to fund a luxurious lifestyle, including purchasing properties and other assets.
Amount of Stolen Funds
The total amount of funds stolen or lost as a result of the QuadrigaCX case is estimated to be around CAD 190 million (approximately USD 145 million). This includes the funds that were locked in the inaccessible cold wallets and the alleged misappropriation of customer funds.
Warning Signs for Users
In hindsight, there were several warning signs that users could have noticed but might have overlooked. Some of these warning signs include:
Lack of Transparency: QuadrigaCX had limited transparency regarding its operations and the security measures in place. Users should be cautious when dealing with exchanges that do not provide clear and transparent information about their wallets, security practices, and cold storage procedures.
Regulatory Compliance: The exchange faced regulatory issues and had challenges with banking partnerships. Users should consider the regulatory compliance and financial stability of an exchange before depositing funds.
Withdrawal Delays and Issues: There were numerous reports of withdrawal delays and difficulties experienced by QuadrigaCX users in the months leading up to the crisis. Persistent withdrawal issues and prolonged delays can be indicative of underlying problems within an exchange.
Personal Control of Funds: The fact that Gerald Cotten had sole control over the private keys to the cold wallets should have raised concerns about the security and accessibility of funds in case of unforeseen circumstances.
It's important for users to exercise caution and conduct thorough due diligence when choosing a cryptocurrency exchange. Researching the exchange's reputation, regulatory compliance, security measures, and withdrawal practices can help users mitigate potential risks.
