The billionaire who took the keys to 76,000 people's money to the grave (QuadrigaCX)

What happens if the only person who knows the password to millions of dollars of client funds suddenly dies? Customers of the Canadian exchange QuadrigaCX learned the answer through their own experience — and it cost them $215 million. For years, the platform looked like a model success story of young Canadian fintech. In reality, behind that facade lay the sole authority of the founder, which no one ever checked.

QuadrigaCX was one of Canada's best-known cryptocurrency exchanges, and its founder, Gerald Cotten, appeared in public as a typical young entrepreneur of the new financial era — approachable, media-friendly, eager to comment on the crypto market for journalists. Customers' trust was reinforced by the platform's scale: thousands of Canadians kept their savings on it, regarding it as a systemically important and reliable player in the local market. The problem was that Cotten single-handedly controlled all of the exchange's wallets — no separation of powers, no independent oversight, no registration with the securities regulator.

The official investigation by the Canadian securities regulator (OSC), published in June 2020, established that QuadrigaCX had effectively operated as a financial pyramid. According to the OSC's findings, Cotten opened accounts under pseudonyms and credited himself with fictitious balances in fiat currency and crypto assets, which he then traded against his own unwitting clients. When crypto asset prices moved against him, the exchange developed a shortfall of funds for payouts — and Cotten covered that shortfall with deposits from new clients, that is, a classic Ponzi scheme. He also transferred part of the funds to external trading platforms without any authorization or disclosure, and spent another part on his own lifestyle.

It all collapsed in December 2018, when Cotten died during a trip to India. Gone with him was the only person who had access to the exchange's "cold" wallets. It turned out that access to a significant portion of the declared reserves simply no longer existed even before his death — the clients' money had already been squandered long before the ability to reach it disappeared.

More than 76,000 clients were harmed, for a total of approximately $215 million. As a result of years of court proceedings, only about $46 million was compensated — a little over a fifth of the total debt. Since Cotten died before any criminal proceedings, the entire case remained without a verdict — with only an administrative finding by the regulator that fraud had been committed.

Published 15 July 2020