Another colossal misfortune greets 115,000 crypto traders who had their funds trapped in the now insolvent crypto exchange QuadrigaCX as it has reported that it is unable to access about USD 190 million of funds stored in the cold storage as well as fiat drafts held in custody, according to a filing for bankruptcy with the Nova Scotia Supreme Court on 31 January.

QuadrigaCX’s misfortune began when the founder and CEO Gerald Cotten reportedly died from Crohn’s disease in early December 2018, but the exchange waited until early January to announce his passing.

It was common practice for Cotten to move funds from the hot wallet into the cold storage for security purposes, and it was his sole responsibility. However noble the act – protecting users from hackers, – his passing has left the crypto exchange in a predicament, as only he has access to the cold wallet storages.

According to the affidavit submitted by Robertson, the storages hold 26,488.59834 Bitcoins; 11,378.79082 Bitcoin Cash, 11,149.74262 Bitcoin Cash SV, 35,230.42779 Bitcoin Gold; 199,888.408 Litecoins; and 429,922.0131 Ethereum as at 18 January and further reports indicated that the exchange was still accepting deposits after Cotten’s death.

The exchange also had challenges with fiat custody as funds that were deposited in a personal account were frozen – the company had no corporate account due to the nature of cryptocurrency business in the region, and funds operated through third-party has also been held back awaiting further order from the court, according to the affidavit.

A total of about USD 32.5 million in fiat is stuck and awaiting court proceedings before any action can be advised. Perhaps there’s hope for creditors funds to be paid back, which is however largely dependent on how the court proceedings turn out. According to the affidavit:

“The residual balance of these funds [once the cost of the proceeding is deducted], combined with net recoveries from other sources, would be made available to satisfy the claims of Quadriga’s creditors as confirmed through the CCAA process.”

The exchange hopes for a preliminary hearing on 5 February to appoint a third-party Ernst & Young Inc., to monitor the proceedings.

While exchanges provide a rather unique opportunity for digital asset owners to interact and have played important roles in the development of the cryptocurrency industry; seeing that most of the promised platforms are yet to launch a viable product, safety remains an issue.

Exchanges continue to battle on the frontline with compliance, market share, liquidity and security threats and perhaps will continue to do so until there are more standard protocols applicable for the industry. Quadriga’s unfortunate situation is bound to trigger some ill feelings towards crypto, and dent what little reputation has been built thus far. Fear that it might follow suit with the biggest cryptocurrency exchange fallout in the history of crypto – the Mt. Gox – is a possibility.

This incident has, however, further demonstrated the need for users of crypto exchange to have more active roles in the control of their funds, whether stored on an exchange or in a cold wallet in case of emergencies and unpredictable natural disaster as with the case of QuadrigaCX. As for exchanges, employing contingent approach such as multi-signature security systems can go a long way to prevent disasters such as this from scaling.

 

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