QuadrigaCX Case Study: How to Not Lose $190 Million
QuadrigaCX, Canada’s largest cryptocurrency exchange, could see its users lose an estimated total of 190 million USD in assets — all because of the untimely death of CEO Gerald Cotten. Here are the details you need to know about this story and an explanation of how using a non-custodial exchange could have prevented this from happening.
What Exactly Happened to QuadrigaCX?
According to CEO Gerald Cotten’s death certificate, he passed away in India after suffering from Crohn’s disease. Cotten’s death was disclosed by the exchange in early January 2019. Additionally, an affidavit was filed on January 31 with the Nova Scotia Supreme Court. Jennifer Robertson, Cotten’s widow, has said that the exchange now owes its customers around 250 million Canadian Dollars (190 million USD) combined in both crypto and fiat.
The affidavit states that the crypto assets include an estimated 26,500 BTC ($92.3 million USD), 430,000 ETH ($46 million), 200,000 LTC ($6.5 million), 11,000 BCH ($1.3 million), 11,000 BSV ($707,000), and 35,000 BTG ($352,000).
Robertson has said that Cotten was the only person at QuadrigaCX who had access to the exchange’s cold storage wallets (wallets that are disconnected from the internet with funds kept offline). Robertson has also stated that QuadrigaCX has hired a consultant to try to decrypt Cotten’s laptop in order to regain access to the funds. As of February 6, these efforts have been unsuccessful. In the meantime, users are unable to access or validate their digital assets and have essentially zero legal options in the short-term.
Cold storage certainly isn’t something that’s exclusive to QuadrigaCX. Many other centralized, custodial exchanges store funds this way to prevent losses of user funds via potential hacks or security breaches. In theory, this practice is considered to be much more secure than storing funds in hot wallets (wallets that are connected to the internet).
However, most exchanges that do this utilize a multi-signature wallet system. This allows multiple people working for a given exchange to be able to access cold wallets using private keys. For example, an exchange could set parameters to allow access to funds by entering in a set number of private keys (i.e. 2 of 3 key sets, 3 of 5, etc.). In the case of QuadrigaCX, the vast majority of its users' funds were under the control of Cotten’s single-signature wallet.
Can QuadrigaCX Users Recover Assets in the Future?
On February 5, 2019, the company posted an official announcement on its website homepage. The first paragraph states:
“Today an order for creditor protection in accordance with the Companies’ Creditors Arrangement Act (CCAA) was issued to allow us the opportunity to resolve outstanding financial issues that have affected our ability to serve our customers.”
The statement goes on to say,
“For the past weeks, we have worked extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves held in cold wallets, and that are required to satisfy customer cryptocurrency balances on deposit, as well as sourcing a financial institution to accept the bank drafts that are to be transferred to us. Unfortunately, these efforts have not been successful.”
If you used QuadrigaCX, you can no longer access the website’s exchange platform (at least temporarily), even to do basic tasks like view your account balance. Creditor protection is in place for 30 days beginning on February 5, and QuadrigaCX has the option to extend afterward. Additionally, Ernst & Young has been appointed by the court as an independent third party to monitor the proceedings.
In sum, it’s currently a complete unknown as to how QuadrigaCX will move forward after this initial period is over. Customers also have no idea if they’ll ever be able to recover lost funds or what this process would entail.
Why Non-Custodial Exchanges Like Ethex Are the Answer
Yes, this scenario could have been prevented. It’s definitely a lesson for why custodial exchanges should use multi-signature wallets. Still, exchanges that utilize multi-signature wallets don’t provide the true accessibility that non-custodial exchanges offer. In reality, this also serves as a larger lesson to be learned by cryptocurrency traders: choose an exchange where you own your own private keys.
Ethex is a non-custodial exchange. This means that you always hold your own private keys, giving you complete control over your funds. In other words, a scenario like the QuadrigaCX scandal isn’t even technically possible with Ethex.
By having 100% ownership of your own funds, you have the ability to access and validate your crypto at any time. This isn’t just an advantage in preventing cases as we see with QuadrigaCX. By using a non-custodial, decentralized exchange, your funds are more secure at all times. You can actively prevent the possibility of falling victim to events like the MapleChange hack of 2018 or numerous other hacks and security breaches that have continued to impact custodial, centralized exchanges in recent years.