Mystery Surrounding 'Lost' $150M Crypto Fortune Deepens As Analysts Question Exchange Founder's Death

We were half-joking when we speculated last week that QuadrigaCX CEO Gerald Cotten - founder of a Canadian crypto exchange that has become embroiled in a $150 million fiasco after Cotten died and purportedly took the keys to the exchange's cold wallets to his grave, rendering his customers' coins immovable - faked his own death in a foreign land to abscond with a fortune belonging to his customers. But a Bloomberg report published Wednesday evening has raised red flags suggesting that this ludicrous "conspiracy theory" might soon become a "conspiracy fact."

Quadriga

Gerald Cotten

But since Quadriga filed for bankruptcy protection last month in the face of a rash of lawsuits being filed by angry customers demanding their coins be returned, a group of analysts and crypto-sleuths have been trying to suss out whether the claims made by Quadriga and Cotten's widow - that the notoriously security-conscious (some might say paranoid) executive was the only employee who handled moving coins deposited with the exchange, and that he had recently shifted the bulk of the exchange's holdings into "cold storage" platforms to which only he possessed the encrypted key, which they have been unable to locate - hold water.

And as it turns out, there has been some suspicious activity that, at first brush, would seem to call these claims into question. As one Cornell professor who spoke with BBG claimed, Quadriga's story didn't pass "the smell test." If the coins were truly frozen, then why hadn't the exchange at least furnished the public keys that would allow auditors to verify their holdings on the blockchain?

The argument that that’s what happened with Quadriga didn’t pass the smell test for many in the industry who are adept at scouring the anonymous ledgers that underpin the decentralized networks for evidence of where digital coins may be stored.

"The Quadriga story doesn’t make sense," Emin Gün Sirer, a professor at Cornell University and co-director of the Initiative for CryptoCurrencies and Contracts, wrote in an email Wednesday. "The one amazing thing about blockchains is that anyone can audit, in essence, any company."

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“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 help of the blockchain,” Sirer said.

But the fact that the exchange hasn't disclosed which wallets belong to it hasn't stopped amateur investigators from analyzing transactions and taking an educated guess.

And what they found might come as disturbing - at least for QuadrigaCX's 115,000 customers. The analysts said they couldn't find any cold wallets holding the Ether that supposedly was one of the cryptocurrencies held on the exchange. Instead, they found that Quadriga had been moving Ether from its wallet to larger exchanges through mid-January.

But that would seem to contradict the exchange's story that Cotten was the only one who had access. After all, he died in December.

Analysis firms such as Elementus say that by examining the blockchain patterns, they can guess which particular wallets holding coins belong to. The researcher says it couldn’t find any cold wallets holding Ether, one of the cryptocurrencies that’s missing. Instead, Quadriga was moving Ether to larger exchanges through mid-January, Elementus said.

At the same time, the patterns could mean that the exchange had set up automatic transfers to larger exchanges when its wallet balances reached a certain amount, or, alternatively, that “there’s some fishy business going on,” Elementus founder Max Galka said.

The head of one exchange where Quadriga had stashed some of its coins said that the vast majority of its holdings recently disappeared. He also noted that not being transparent about where coins are on the blockchain is troubling.

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 to be transparent" about where the money is exactly on a blockchain "is unusual," said Christine Duhaime, a Canadian lawyer specializing in anti-money laundering.

According to the company, Cotten, aged 30, died of complications from Crohn's disease in Jaipur, India in December while reportedly doing research for an orphanage he planned to build.

But if the coins have in fact been moved since his death, that could mean one of two things: Either the exchange is lying, and Cotten's former colleagues are seeking to take advantage of his death by robbing his customers.

Or, Cotten is still alive, and has already taken the money and run?