The mysterious circumstances surrounding the implosion of QuadrigaCX—widely-viewed as Canada’s biggest cryptocurrency exchange—involve a company holding on to customer assets worth hundreds of millions, seemingly seemingly because its 30-year-old founding CEO Gerald Cotten was the only one with access.
According to a sworn affidavit published by Coindesk, Cotten passed away suddenly in December, while in India. His widow, Jennifer Robertson, says he was the only one who could access the virtual keys to a virtual fortune. About 115,000 customers say they’re owed a quarter billion dollars ($190 million CAD in cryptocurrency and $70 million CAD in cash). Yesterday, a Nova Scotia Supreme Court judge granted Quadriga 30 days of creditor protection, a kind of “time out” in a bid to give it a breather from lawsuits against it while it tries to access or recover the missing funds or come up with some other solution.
Strangely, Cotten filed a will 12 days before his death that made Robertson the executor of his estate and outlined what to do with his real estate, plane, yacht, and his two pet chihuahuas, Gully and Nitro. Even his frequent flier points were bequeathed (to Robertson). But there was no apparent mention of what to do to access the funds and assets for his business.
This unique story has already generated loads of speculation, and a firestorm on online forums like Reddit.
Regardless of how the case pans out, based on what little we know, the Quadriga debacle is a cautionary tale about the dangers of investing in the nascent cryptocurrency sector. Here are some of the main takeaways for people who invest in crypto or have ever considered it:
Hanging out on an exchange is a no-no
Don’t leave your cryptocurrency or cash longer than you need to on an unregulated exchange like Quadriga. Cryptocurrency exchanges are typically used for three things: to trade one type of cryptocurrency (like bitcoin or ether) for another; to exchange crypto for fiat currency (Canadian dollars, euros, yen, etc.), or to store digital assets.
Legal expert and entrepreneur Addison Cameron-Huff is following the Quadriga case closely. He has a deep understanding of the industry and is a blockchain lawyer (blockchain is the technology that underpins cryptocurrencies like Bitcoin). He has been involved in the cryptocurrency industry for years and he knew Cotten, who was a prominent figure in the crypto community, though he has never represented him, or his company.
Cameron-Huff suggests using items specifically designed for storing crypto assets such as digital wallets instead. He says keeping digital assets on an exchange––which is an intermediary––can be risky and says “consider how much money you’d be willing to lend a stranger and how upset you’d be if they didn’t pay you back that amount.”
Understand that crypto has no safety net
Putting your money into cryptocurrency isn’t for the faint of heart. When it comes to investor protections in Canada––it’s kind of a Wild West from a regulatory standpoint. The crypto markets are extremely volatile, and the swings you’ll see are unlike anything you might encounter on a roller coaster of a day on the stock market. There’s a saying that “crypto never sleeps” and it’s true that these markets are open 24/7. Expect the unexpected, at any time.
When it comes to dealing with third-party services for buying and selling cryptocurrency, exchanges like Quadriga aren’t regulated like a bank, or a stock exchange. If they go under, customers can expect some consumer protection, especially if contracts are found to have been breached. But customers are “unsecured creditors”––meaning that when all the people and entities that Quadriga owes money to are lined up, unsecured creditors are last in line.
Experts suggest unsecured creditors would be lucky to get a fraction of what they’re owed and it could take months, or years, or forever.
The Quadriga case has been called “Canada’s Mt. Gox”––a reference to the infamous Bitcoin exchange based in Japan that closed unexpectedly in 2014, owing hundreds of millions to its customers. Victims of Mt. Gox, including Canadian users, still haven’t gotten a penny through the courts. At the time, Mt. Gox was handling 70 percent of all bitcoin transactions in the world. The notion that the biggest, most recognizable exchanges are somehow immune to failure, simply isn’t true.
Unlike Japan and Australia, which have specific rules on how cryptocurrency exchanges can operate, there is no such oversight in Canada. Proceed with caution, understand the risks involved, and don’t use money that you’re not willing to risk losing.
Have a plan for all your digital assets
The Quadriga case is fascinating, and while most people will never be in charge of hundreds of millions of dollars worth of funds, having a plan for what to do––if you can no longer decide––with your bitcoin, litecoin, ether or whatever you’ve purchased, is smart.
Cameron-Huff says it’s worth thinking about ahead of time, and that applies to all your virtual property. “Digital assets like Facebook accounts, bitcoin, and online photo albums are an increasingly large part of our lives. As society transitions to digital everything, there’s a need for digital estate planning.”
A roadmap of what to do with your virtual holdings isn’t possible if you don’t understand the rules that tech platforms have over what you own, or what you’ve created. The story of Quadriga highlights the increased risk of interacting with a third-party, like an exchange. You should probably do this with any service you use, but it’s worth reading and understanding the “terms of service” and the fine print. Too often, we scroll through pages of jargon and click the “I Agree” button without a second thought. It’s time to change that laissez-faire behaviour. That may be one of the biggest takeaways from this fiasco.
Don’t get caught up in FOMO
As with anything that you choose to invest in, you should do your homework. Getting into cryptocurrency with a plan to get-rich-quick, or simply because of FOMO, is how so many people have gotten burned. The crypto industry is in its early days, and as Quadriga’s fall from grace shows, even the biggest names aren’t guaranteed to stick around.
Because exchanges like Quadriga operate without government oversight in Canada, its troubles have renewed calls for regulation.
Cameron-Huff doesn’t think that’s warranted, although he does admit it would be very good for his business as a compliance expert. “One company’s failure doesn’t mean that other companies aren’t doing the right thing. There’s often a call for regulation when something goes wrong, but that effort may create new problems, exclude certain people or create additional costs,” he says.
Part of the ethos of cryptocurrency is that it is accessible to anyone with a little digital savvy and a faster, cheaper alternative to using a third party like a bank or a platform like PayPal. Heavy-handed regulation could erode those advantages.
Alternatives to regulation include voluntary steps by players in the industry. Blockstream is a Bitcoin development company which is working on a “proof of reserves” tool that allows cryptocurrency exchanges to prove their liquidity.
Japan and Australia have regulations specifically for cryptocurrency exchanges. In fact, Japan’s unregulated exchanges have created a coalition of companies that are attempting to self-regulate. The consequences of not following the rules are getting kicked out of the group, though it does seem to operate on the honour system.
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