Boasting one of the most gung-ho financial marketplaces, the world of cryptocurrency trading is rife with all manner of scams with unwitting investors already having lost billions of dollars. While most investors think about hacking schemes, now they’ll be thinking about exit scams—and what happens when the owner of an exchange just disappears, or dies, and takes its clients’ money with them to the grave.
Thousands of Canadian investors have just had a rude awakening to this side of the crypto arena. In a rather bizarre incident, an estimated 90,000+ investors in Canada’s largest cryptocurrency exchange, QuadrigaCX, have been left without recourse after the CEO and owner, Gerald Cotten, passed away and took his passwords with him. Related: U.S. Stocks See Strongest January In Decades
That much came to light on January 31 after the deceased’s widow, Jennifer Robertson, filed for creditor protection from the Supreme Court of Nova Scotia. Robertson testified that most of the company’s funds, estimated at $250M CAD (about USD $190M) in fiat and digital tokens, were locked away in an online blackhole after her husband secured the funds in an encrypted cold wallet than only he knew how to access. Cotten allegedly succumbed to Crohn’s disease and passed away last December while on a humanitarian mission in India.
While nobody has yet come out and openly declared this latest incident as another exit scam, it still leaves quite a lot to be desired. First off, it casts a dark cloud over a huge exchange given that Cotten apparently had no insurance cover for client funds despite the fact that some prominent companies now provide cover for digital assets.
But more importantly, how such a large operation became a one-man show is difficult to fathom.
According to Robertson’s affidavit, Cotten “took sole responsibility” for managing the exchange despite a group of directors having played an oversight role. Crypto funds are usually managed using private keys, meaning that funds can be lost if the owner disappears without divulging the details to another party. According to the affidavit, Cotten kept his passwords in an encrypted laptop and an encrypted USB drive, neither of which can currently be accessed.
Another disturbing revelation was that Cotten signed his will on Nov. 27 just days before his demise on Dec. 9, leaving several provisions such as $100,000 for the care of his pet chihuahuas, yet no instructions for retrieving customer funds in the event of his death.
But perhaps most damning of all is the story doing rounds on social media platforms that Quadriga’s alleged co-founder, Michael Patryn, is in reality a convicted felon whose real name is Omar Dhanani—an individual who allegedly served jail-time for online identity theft.
Is Bakkt the answer?
The grim saga is a clear demonstration of some of the pitfalls of the crypto and blockchain industry. While blockchain technology helps promote accountability and transparency, it also allows entities to operate anonymously with little or no legal oversight.
Maybe wary investors should take a cue from JPMorgan, which recently declared that the only way it would test the crypto market was through the newly-minted institutionally-backed crypto exchange, Bakkt.
"Bakkt is the only place we’d approach Bitcoin and the crypto space. Any and all other ‘set ups’ just don’t rise to the legal standard that is acceptable risk for us. Bakkt is the only place that passes that test. Whether we are there as soon as the door opens, or window shop for a few months, it is the only name we are considering in terms of client funds finding their way into crypto."
Bakkt is an exchange that was created through a partnership by tech and industry giants including Microsoft, Starbucks and Intercontinental Exchange. Bakkt could hit the ground running judging by the amount of institutional enthusiasm and wherewithal behind it.
By Alex Kimani for conil.me