Thursday 28 Mar 2024
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This article first appeared in The Edge Financial Daily on February 8, 2019

KUALA LUMPUR: While there have been many reports of cryptocurrency exchanges losing their investors’ funds due to hacks, Canadian digital asset exchange Quadriga CX is the first to have lost access to investors’ funds following its chief executive officer (CEO) Gerald Cotten’s death.

Cotten, holder of the exchange’s private keys, died during a visit to India last December, taking to the grave the private keys and passwords needed to access the company’s funds, locking up about C$180 million (RM553 million) worth of cryptocurrencies to its investors’ chagrin.

According to news reports, the Vancouver-based exchange holds about C$180 million worth of cryptocurrencies including bitcoin, litecoin and ether, along with C$70 million worth of fiat currency.

The company had requested for protection against creditors for 30 days and the appointment of Ernst & Young to sort out Quadriga’s finances and explore a possible sale, approved by the Supreme Court of Nova Scotia.

Cotten died of complications due to Crohn’s disease on Dec 9, 2018, while travelling to open an orphanage in India, according to a Facebook post by the company dated Jan 14.

According to an affidavit filed by Cotten’s widow Jennifer Robertson, only the coins in Quadriga’s hot wallet — connected to the Internet used by exchanges to facilitate faster withdrawals — can be accessed, containing 15.62 bitcoins. The amount was subsequently disbursed.

Meanwhile, the bulk of coins worth C$180 million held in cold wallets — not connected to the Internet to protect them from unauthorised access — could not be accessed. The company is continuing in taking steps to find and access the wallets.

The company has also hired an outside expert to try hacking into Cotten’s computers as well as an encrypted USB key, but to no avail.

As at Jan 26, the platform’s operations were temporarily suspended, leaving Quadriga unable to complete transactions by its users.

The affidavit said the company intends to explore all options available to address its obligations to its affected users, including selling the operating platform if necessary.

It further said multiple parties had approached the company expressing interest in the platform, which could potentially lead to value being realised for Quadriga’s creditors’ benefit.

There have been many cases of cryptocurrencies lost following the owners’ death, due to the cryptography used in securing a digital asset wallet.

Each wallet uses a public key — a string of random characters visible to anyone — to send and receive cryptocurrency, as well as a private key — another string of random characters allowing the owner access to the digital wallet’s content.

Unless the private keys are shared with a trusted party, there is little anyone can do to access the locked up digital assets when the wallet holder dies.

In a study conducted in mid-2017, blockchain forensics firm Chainalysis estimated between 2.78 million and 3.79 million bitcoins could have been lost forever, making up about 17% to 23% of the cryptocurrency supply at the time.

The lost coins were worth US$12.79 million, based on bitcoin’s trading price of US$3,375 per coin at the time of writing.

The firm found 2% of bitcoins were lost through transactions, arising from misdirected transactions or the loss of a private key through death or carelessness.

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