Users of Canadian cryptocurrency exchange Quadriga CX are hoping for answers as the company heads to court Tuesday to seek creditor protection after it reported millions in customer funds are missing.
Quadriga Fintech Solutions Corp., which owns and operates the exchange, has applied for relief under the Companies' Creditors Arrangement Act (CCAA) and is seeking to appoint Ernst & Young Inc. as a monitor. The application will be heard Tuesday in the Supreme Court of Nova Scotia.
Quadriga says it has been unable to locate and access about $180-million worth of cryptocurrency, which includes bitcoin and ether, since the death of its co-founder Gerald Cotten. (A report from Ernst & Young previously valued the cryptocurrency at $190-million.)
Mr. Cotten, 30, died on Dec. 9 from complications related to Crohn’s disease while travelling in India, according to court documents. A statement on Quadriga’s website said he was in the country to open an orphanage. Quadriga kept the majority of its cryptocurrency in “cold wallets,” an offline storage method that protects the funds from hacking. Mr. Cotten had sole responsibility for handling the funds and held the digital security keys to access the wallets, which the company could not find after his death. “Quadriga was unable to access the cold wallets and/or discovered that the cold wallets contained minimal cryptocurrency units,” according to a report filed by Ernst & Young.
Now the company is facing a liquidity crisis, as it owes customers $70-million in cash and $180-million in cryptocurrency. There are roughly 115,000 users with active balances in their personal accounts at the exchange, according to the latest court filing.
Vancouver resident Michael Tinant had roughly $17,000 in his account at the exchange. He requested to withdraw it three months ago, but the money has yet to appear.
“It’s not my life savings or anything like that but I hate to lose it," Mr. Tinant told The Globe and Mail in an interview. "You immediately think of what you could have bought with it.”
Mr. Tinant questioned the circumstances around Mr. Cotten’s sudden death.
“It seems a little bit suspicious, but who knows,” he said, adding that he’ll be happy if he gets even half of his money back. “When I bought bitcoin, I was just kind of buying it over the years as more of a lottery ticket than anything.”
In online forums, users speculated wildly about what may have transpired. In her affidavit, Mr. Cotten’s widow Jennifer Robertson says there has been a significant amount of comment on Reddit and other forums about the matter, including questions about whether Mr. Cotten is actually dead. The CCAA filings contain a statement of death issued by J.A. Snow Funeral Home in Halifax. The funeral home declined to provide any additional information, citing customer privacy.
Global Affairs Canada, when asked about Mr. Cotten’s death, also declined to provide further information, due to provisions of the Privacy Act.
“Our thoughts and sympathies are with the loved ones of a Canadian who recently died while visiting India,” the agency said in an e-mail last month. “We are providing assistance to the family at this very difficult time.”
One Quadriga user named Yi Sun, also known as Steven Sun, filed a lawsuit against the company in British Columbia in October, 2018. Mr. Sun, who listed an address in Vancouver, said he sold bitcoin on the exchange and tried to withdraw $213,158.40 in proceeds from his Quadriga account in mid-August but received only a portion of the money in three separate transfers in September and October. Mr. Sun never received the rest – $137,379.40 – despite “repeated demands,” according to court documents.
In November, Mr. Sun asked the court for a default judgment since Quadriga had not filed a response to his claim and had “failed and refused” to repay him. The court agreed in a ruling issued in December.
On Monday, Mr. Sun filed a notice of contest in the CCAA proceeding, saying that while Quadriga later agreed to pay him, he still had not received the funds. The notice says Mr. Sun intends to participate as a creditor in the proceeding.
Neither Mr. Sun nor his lawyer could be reached for comment. A lawyer representing Quadriga declined to comment.
One Edmonton-based customer, to whom The Globe has granted anonymity because his family doesn’t know about the missing funds, said the $15,000 he had sitting on his exchange was a portion of his savings.
It wasn’t the first time the Edmonton user had withdrawn from Quadriga; he frequently used the exchange to cash out his cryptocurrency holdings into Canadian dollars, and most of his withdrawal requests had been successful, though they typically took longer than the 14 business days promised for a bank transfer. His most recent withdrawal request failed to go through, however.
Quadriga also has funds tied up with third-party payment processors. The company had difficulty obtaining corporate bank accounts and instead relied on payment processors to transfer funds. Court documents say an “organization” identified as WB21 is holding millions of dollars belonging to Quadriga but is refusing to release the money or even respond to communications from the company. WB21 acted similarly to a third-party payment processor and holds nearly $9-million in Canadian funds and US$2.36-million belonging to Quadriga.
Stay up to date on all our Streetwise stories. We have a Streetwise newsletter, covering mergers and acquisitions, plus financial services news. It is sent Tuesday to Saturday morning. Sign up today.