Sleuths scour for frozen Quadriga coins in crypto drama

This article first appeared in The Edge Financial Daily, on February 8, 2019.
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THE death of a cryptocurrency executive trapped C$190 million (RM576.48 million) on a Canadian exchange. Or did it? Ever since Quadriga CX revealed last month that founder Gerald Cotten, who died in India in December, was the only person able to access the exchange’s digital ledgers, scores of blockchain analysts, research companies and amateur sleuths have been arguing over whether some of the money has been moving between accounts since he died and even if the coins existed at all.

Cotten’s widow set off the firestorm by seeking protection from creditors for the Vancouver-based company, saying her late husband was “very conscious about security” and that she does not know the password or recovery key of his encrypted laptop nor could she find anything written down despite repeated searches. 

Without the key to the digital accounts, it is extremely difficult to unlock the ledger and move the more than US$144 million (RM586.1 million) in coins that Quadriga CX had stored on its exchange. While proponents of digital currencies argue that the blockchain’s incorruptible nature is its primary feature, investors the likes of bitcoin and ether have frequently lost their digital codes, locking themselves out of their accounts with little recourse.

The argument that that is what happened with Quadriga did not pass the smell test for many in the industry adept at scouring the anonymous ledgers underpinning the decentralised networks for evidence of where digital coins may be stored. “The Quadriga story does not make sense,” Cornell University’s professor and the Initiative for CryptoCurrencies and Contracts co-director Emin Gün Sirer wrote in an email on Wednesday. “The one amazing thing about blockchains is, anyone can audit, in essence, any company.”

A judge is scheduled to deal with a motion to appoint lawyers who will represent Quadriga account holders at a hearing on Feb 14 in Halifax Supreme Court, according to a court filing on Wednesday. The move comes after some holders asked the courts to have Bennett Jones LLP and McInnes Cooper represent them during the Companies’ Creditors Arrangement Act proceedings. 

Cotten’s widow Jennifer Robertson said her husband moved most of the digital assets to cold storage, and that she brought in experts to try hacking into his other computers and mobile phone with only “limited success”. Attempts to circumvent an encrypted USB key have been foiled, she said in the court filing. “If the funds are frozen and the cold wallet is inaccessible, it should be possible for the exchange to provide the cold wallet addresses so their claims can be verified with the blockchain’s help,” Sirer said.

Analysis firms such as Elementus said by examining the blockchain patterns, they can guess which particular wallets holding coins belong to. The researcher said it could not find any cold wallets holding Ether, one of the cryptocurrencies missing. Instead, Quadriga moved Ether to larger exchanges through mid-January, Elementus said. At the same time, the patterns could mean the exchange had set up automatic transfers to larger exchanges when its wallet balances reached a certain amount, or “there is some fishy business going on”, Elementus founder Max Galka said.

The virtually unregulated world of digital currencies has been a breeding ground for hacks and thefts since the bitcoin was invented more than a decade ago. Last year alone saw at least five major attacks. Japan, home to some of the world’s most active digital-asset exchanges, also hosted two of the biggest known cryptocurrency hacks: the Mt Gox debacle of 2014 and the theft of nearly US$500 million in digital tokens from Coincheck Inc last January.

Jesse Powell, head of exchange Kraken, said it has some Quadriga balances. Of about 230,000 ether coins that Quadriga is supposed to have had, only about 1,000 coins remain in its own wallets, Galka said. “Not being transparent” about where the money is exactly on a blockchain “is unusual”, said Canadian lawyer Christine Duhaime specialising in anti-money laundering.

Cotten died of complications due to Crohn’s disease in Jaipur, India, according to Robertson’s affidavit and a statement of death from JA Snow Funeral Home in Halifax. Richard Niedermayer, a lawyer with Stewart McKelvey in Halifax who represented Robertson, declined to comment on Wednesday. Some 115,000 users had deposits at the exchange when it stopped working, according to Robertson’s affidavit filed on Jan 31. — Bloomberg