Gerald Cotton, the late CEO of bankrupt crypto exchange QuadrigaCX, may have been syphoning off funds long before his untimely death.
With the exchange filing for creditor protection in January, technical experts have been analysing Cotton’s laptop in an effort to retrieve $137 million in user funds. After hacking their way into the computer, experts at Ernst & Young found that QuadrigaCX accounts had been emptied in April 2018.
Investigators Unfreeze Cold Wallets and Find Nothing
Prior to his death, Cotton had been the only person with access to the cold wallets used to store exchange funds. After learning of his death in December 2018, many suspected it was an elaborate scam designed to steal millions in Bitcoin (BTC) and other digital altcoins. Although a statement from Fortis Escorts Hospital in Jaipur confirmed the death wasn’t a hoax, the saga is far from over.
According to Ernst & Young, Cotton kept limited records and never reported his company’s financial activity. What’s more, 14 user accounts have been linked to Cotton. As well as using them to trade on the exchange, it’s believed he withdrew profits to addresses not linked to QuadrigaCX. With the former CEO unable to stand trial, we may never know why the cold wallets were emptied. However, there is speculation that Cotton was planning to declare bankruptcy and make off with user funds.
At this stage, a Canadian court has given the company a 45-day extension to retrieve the money or provide a better overview of what happened. If it’s unable to do so by mid-April, creditors will be allowed to file lawsuits against QuadrigaCX. While that may be positive news for creditors, it will come as little comfort to users who stand to lose their crypto balances forever. Indeed, with funds so easily hidden, the question of regulation has once again become a talking point.
Regulation May be the Only Solution
Would regulation make crypto exchanges safer? Image source: Kan_chana/Shutterstock.com
Currently, cryptocurrency exchanges don’t need an operating licence. Although companies such as Coinbase Exchange have aligned themselves with financial regulators in the US, it’s not a legal requirement.
In contrast, when traders use a traditionally non-crypto trading platform like eToro Exchange, they’re protected by the Financial Conduct Authority (FCA). Although FCA approval doesn’t make an exchange 100% safe, it does guarantee a level of quality, security and, importantly, accountability. By forcing online exchanges to provide proof of address, where user funds are kept and its employees, financial regulators can maintain strict codes of conduct.
Beyond their ability to enforce certain rules, financial regulators will handle compensation claims. In the case of QuadrigaCX, users would have received a certain amount of money back had it been regulated by the FCA. Of course, the issue here isn’t just with QuadrigaCX.
Although the discovery of empty wallets has brought the issue to light, regulation is something all exchanges need to consider. As well as protecting consumers, industry-wide regulation would further legitimise cryptos, making them more attractive for big businesses. So, while cryptocurrencies have always strived to break the mould, regulation is one area where it should consider falling in line with mainstream financial institutions.
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