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At the end of last week, troubled Canadian cryptocurrency exchange QuadrigaCX filed for creditor protection with the Nova Scotia Supreme Court. The move was made in an attempt to avoid declaring bankruptcy, and the exchange asked that the advisory service Ernst & Young Inc. step in to monitory the company while it "address[es] the significant financial issues that have affected our ability to serve our customers."
Creditors, however, might not be QuadrigaCX's only problem. Taylor Monahan, founder and CEO of MyCrypto, tweeted some of her findings today, February 4, regarding QuadrigaCX's Ether funds, or lack thereof. According to her tweet, after looking at the exchange's three main wallet addresses, how much Ether the exchange currently has in reserve is questionable.
A Little Bit of Background
In January 2018, the Canadian Imperial Bank of Commerce (CIBC), froze multiple accounts opened by QuadrigaCX's payment processor, Custodian Inc. The bank claimed that it had been unable to determine whether the exchange or the individuals associated with the accounts owned the money. Of the $67 million that had been deposited into the Custodian Inc. accounts, 25.7 million Canadian dollars and $69,000 USD was frozen by CIBC.
After a court battle, QuadrigaCX took to reddit to announce that on December 3, 2018, a judge had ruled in the exchange's favor and that the funds held by CIBC would be released. Later, on December 25, the exchange tweeted that the funds had been received and would be made available for those looking to withdraw on December 27.
But withdrawal issues continued to persist with the exchange. On January 28, QuadrigaCX posted a message on its site claiming an upgrade was being performed. Then, another message appeared, stating the site was down for maintenance purposes. Whether it was upgrades or maintenance, some users reported that withdrawals were stuck in a "pending" state while the site was down.
The Death of an Exchange Owner
On January 14, QuadrigaCX tweeted about the passing of its CEO and founder, Gerry Cotten. In an affidavit filed by Cotten's widow, Jennifer Robertson, it was revealed that Cotten died in India on December 9, 2018. The document also revealed that the exchange owes approximately $250 million to users in cash and cryptocurrency obligations.
According to the affidavit, Cotton had "sole responsibility" for handling the exchange's funds and coins, including an "excess of $180 million of coins in cold storage." The affidavit summarizes the problem: "The laptop computer from which Gerry carries out the Companies' business is encrypted and [Robertson] does not know the password or recovery key." The inaccessible coins held in cold storage, per the affidavit, include about 26,488 bitcoin, 11,378 bitcoin cash, 11,149 bitcoin cash SV, 35,230 bitcoin gold, 199,888 Litecoin, and 429,966 Ether.
This is where Monahan's sleuthing comes into play. Monahan's original tweet concluded that zero Ether was being held in the exchange's three main addresses. However, after research, Monahan found that all three main wallets deposited 218,000 Ether to Poloniex, 44,000 Ether to Bitfinex, and that $4.4 million worth of Ether was traded for bitcoin on ShapeShift. Ultimately, there now appears to be about 940 Ether held in one of QuadrigaCX's cold wallet reserves, far flung from the 429,966 claimed in the affidavit.
It doesn't end there. An analysis of QuadrigaCX's bitcoin holdings posted on Medium by ZeroNoncense claims that there are "no identifiable cold wallet reserves." The report explains that QuadrigaCX "more than likely" never held enough bitcoin to account for its users' funds, meaning the exchange was "using deposits from their customers to pay other customers once they requested their withdrawal."
By verifying a collection of transactions that were to or from QuadrigaCX, and working backwards, ZeroNoncense states:
"[T]he estimated aggregated total number of bitcoins in QuadrigaCX's possession is south of 1,000 $BTC, with 1,000 being a very generous estimate at this point in time ... Chain analysis shows that the vast majority of holdings in the wallets and addresses that QuadrigaCX owns have already been liquidated or moved to an exchange."
While the exchange's bitcoin reserves may be missing, a user on reddit believes they have found the exchange's Litecoin holdings. The user states that apparently funds are being moved out of the wallets, meaning someone other than Cotten has access, despite the claims made in the affidavit.
To say not much is adding up feels like the understatement of the year, and it's only February.
The only thing known for certain is on February 5, the Nova Scotia Supreme Court will hold a preliminary hearing regarding QuadrigaCX's creditor protection application.