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The Nova Scotia Supreme Court is conducting hearings as Canada's largest cryptocurrency exchange Quadriga seeks creditor protection in the wake of the sudden death of its founder and chief executive in December and missing cryptocurrency worth roughly $190-million,Andrew Vaughan/The Canadian Press

The wary skepticism that Canada’s big banks have for the cryptocurrency industry was on full display on Friday when a Nova Scotia judge issued an order for the eventual disbursement of more than $30-million that belonged to the insolvent QuadrigaCX trading platform.

Lawyers for the Bank of Montreal and the court-appointed monitor overseeing the case, Ernst and Young, said the banks are uncomfortable handling money from the cryptocurrency world, saying the uncertain origin of the funds raises concerns about possible money laundering.

“This is not a typical situation,” said one lawyer who took part in the hearing through a conference call.

Elizabeth Pillon, a lawyer representing Ernst and Young, said the banks had made it clear they were in uncharted territory.

“I don’t blame them for hesitating,” she told the court, saying there were “money-laundering issues” raised by the banks.

“We don’t have the source-of-funds information that the banks are looking for,” she said. “The monitor has serious concerns about finding another institution to hold these funds.”

At the conclusion of the hearing, Justice Michael Wood of the Nova Scotia Supreme Court issued an order that will eventually see the QuadrigaCX money deposited in a Royal Bank account, which Ernst and Young will use to pay for the continuing court proceedings.

As well, the money could also be used to partly compensate 115,000 users of the QuadrigaCX exchange who are owed $260-million in cash and digital assets following the demise of the virtual operation on Jan. 28 amid a swirl of controversy.

The case attracted international headlines last month, when the company revealed its chief executive and sole director, Gerald Cotten of Halifax, had died suddenly on Dec. 9 while travelling in India, leaving his company without access to about $190-million in Bitcoins and other cryptocurrency.

According to the CEO’s widow, Jennifer Robertson, Mr. Cotten was the only member of the QuadrigaCX team who knew the encrypted pass codes needed to gain access to the company’s cryptocurrency reserves.

When QuadrigaCX was in business, it couldn’t get a bank account because of the reluctance of traditional banking institutions. As a result, it turned to third-party payment processors to handle their accounts.

Court documents show that in January, 2018, CIBC froze the accounts for a payment processor known as Costodian, preventing QuadrigaCX from getting at more than $25-million. The bank said it was unable to determine who the funds belonged to, so it turned to the courts for help.

That money, in the form of five Bank of Montreal bank drafts, was eventually returned to the Costodian and will soon be deposited into the monitor’s Royal Bank account, according to the court order issued on Friday.

Another $5-million in other bank drafts are also expected to be handed to RBC, along with an unspecified amount of money from several third-party processors.

However, the Royal Bank “expressed hesitation” about accepting and distributing the money without “direction and relief” from the court, according to a monitor’s report issued Feb. 20.

In a draft court-order submitted to Justice Wood, both Royal Bank and the Bank of Montreal agreed to transfer the funds, but both banks included clauses aimed at limiting their liability while carrying out their duties.

Justice Wood questioned the banks’ lawyers about the need for such provisions, suggesting they may have gone too far.

“There’s always business risks in everything you do,” he told the lawyers.

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