$137 million in Bitcoin, other cryptocurrency lost after man who ran exchange suddenly dies, taking passkeys with him

$137 million in Bitcoin, other cryptocurrency lost after man who ran exchange suddenly dies, taking passkeys with him
Centralized cryptocurrency exchanges use "hot" wallets to facilitate transactions. (Pexels)

(Gray News) – Roughly $137 million in Bitcoin and other cryptocurrency is stuck on an exchange that has ceased operating, after the exchange’s 30-year-old founder died suddenly and took the digital keys to unlock the funds with him to his grave.

The Canadian exchange, QuadrigaCX, also has another $53 million in cash that it owes to users frozen. Coindesk first reported last week on a court affidavit that revealed the extent of QuadrigaCX’s troubles.

The company scrapped its website on Jan. 31. It left only a message saying it had applied for creditor protection to address “significant financial issues” that have come to light in the wake of the death of Gerald Cotten, who founded the exchange.

The company announced Cotten’s death in mid-January, Coindesk reported. He was said to have died while traveling in India in December, a result of complications from Crohn’s disease.

“He was a quiet, serious guy with big plans ... an honest guy,” Adam Goldman, an industry peer, told the Canadian Broadcasting Corporation.

QuadrigaCX says it has been working “extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves” and to source a bank “to accept the bank drafts that are to be transferred to us.”

At issue are how cryptocurrency funds are stored.

While each and every Bitcoin, for instance, is securely stored in a public blockchain, investors access and personally “store” their Bitcoin in “wallets.”

Wallets effectively host the digital addresses that confirm Bitcoin ownership and facilitate its movement, and are unlocked by private digital passkeys.

People trading on centralized exchanges like QuadrigaCX, or larger, more popular ones like Coinbase and Binance, have to use a “hot” wallet. This is a wallet that’s hosted on an online server, and can accommodate transfers around the internet.

You also don’t have the passkey to these wallets – the exchange does. You simply sign into the exchange, trusting that it will secure your funds.

A “cold” wallet, meanwhile, is hosted offline on hardware, usually a laptop or popular products like the USB stick-style Ledger Nano. They’re slower for moving funds and can’t be used to convert cryptocurrency back into regular dollars and cents, but they’re also safer from hacking attempts and, importantly, you own the passkey to them.

In the case of QuadrigaCX, Cotten’s wife Jennifer Robertson, the executor of Cotten’s estate, is claiming in the affidavit obtained by Coindesk that the $137 million in cryptocurrencies owed to users is locked away in a cold wallet.

No one besides Cotten knew the passkeys for the cold wallet.

“Quadriga keeps only a minimal amount of coins on the server (in a hot wallet),” the affidavit says. “The normal procedure was that Gerry would move the majority of the coins to cold storage as a way to protect the coins from hacking or other virtual theft.”

Essentially, the overwhelming amount of the funds being traded on the QuadrigaCX exchange weren’t really there. They were actually backed up in Cotten’s cold wallet, and as coins were withdrawn or sent offsite through hot wallet transactions, he would replenish the hot wallet funds.

“Transfers from the cold wallet to the hot wallet would occur when the hot wallet was running low and withdrawals were being sent to users,” the affidavit says. “The transfer of coins from the cold wallet to the hot wallet was performed manually by Gerry.”

When he died, there was no one else to perform this process.

Robertson has enlisted computer specialists to try and access Cotten’s computers and, hopefully, find the passkey to the cold wallet on them. They’ve also tried to access various email accounts and messaging accounts.

They have not, however, been successful.

“Gerry was always very conscious about security,” the affidavit states.

There are more wrinkles to the situation. The mysterious circumstances also gave rise to theories that Cotten hadn’t actually died (though Robertson included his death certificate with the affidavit), and at least one payment processing firm holding some of the company’s cash funds disputed the amount attributed to it in the affidavit.

The firm, WB21, told Coindesk it “did not confirm the balances mentioned in the affidavit to be correct.”

The affidavit claimed that firm was holding about $9 million on behalf of QuadrigaCX.

Cryptocurrency developers, activists and investors have warned about problems such as these with centralized exchanges, and claim decentralized exchanges, run automatically without a central operation – or single operator, like Cotten – would promise complete security.

But development of fully decentralized, smoothly functioning and easily accessible exchanges has proven difficult, and currently very little crypto trading activity occurs on these exchanges.

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