Picture: ISTOCK
Picture: ISTOCK

Digital-asset exchange Quadriga CX has a $200m problem with no obvious solution — this is the latest cautionary tale in the unregulated world of cryptocurrencies.

According to court documents filed in January, the online start-up cannot retrieve about C$190m ($145m) in bitcoin, litecoin, ether and other digital tokens held for its customers — nor can the Vancouver-based Quadriga pay the C$70m in cash they owe.

Access to Quadriga’s digital wallets — an application that stores the keys to send and receive cryptocurrencies — appears to have been lost with the passing of 30-year-old CEO Gerald Cotten, who died in December from complications around Crohn’s disease. 

Cotten was always conscious about security — the laptop, e-mail addresses and messaging system he used to run the five-year-old business were encrypted, according to an affidavit from his widow, Jennifer Robertson.

Cotten took sole responsibility for everything regarding the business, from the handling of funds and coins, and the banking and accounting, to the security. He ran extra measures to avoid the business being hacked. He is said to have moved the “majority” of digital coins into cold storage.

His security measures are understandable. Virtual currency exchanges suffered at least five major attacks in the past year. Japan, which is home to some of the world’s most active digital-asset exchanges, has also hosted two of the biggest known crypto hacks: the Mt Gox debacle of 2014 and the theft of nearly $500m in digital tokens from Coincheck last January.

In court papers, Robertson said she cannot find his passwords or any business records for the company. Experts brought in to try and hack into Cotten’s other computers and mobile phone made little headway and only had “limited success”. Attempts to circumvent an encrypted USB key have also been unsuccessful.

“After Gerry’s death, Quadriga’s inventory of cryptocurrency has become unavailable and some of it may be lost,” Robertson said. She added that the company’s access to currency has also been “severely compromised” and the firm has been unable to negotiate bank drafts provided by different payment processors.

Quadriga’s directors posted a notice on the firm’s website on January 31 that it was asking the Nova Scotia court for creditor protection while they address “significant financial issues” affecting their ability to serve customers. A hearing is scheduled for Tuesday, and Ernst & Young has been chosen as a proposed monitor.

“For the past weeks, we have worked extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves held in cold wallets, these are required to satisfy customer cryptocurrency balances on deposit, as well as sourcing a financial institution to accept the bank drafts that are to be transferred to us. 

“Unfortunately, these efforts have not been successful,” the company said.

As is often the case with digital currencies, the episode has raised speculation on online forums, where posters are wondering if the business was a scam, calling for a class-action lawsuits and even concocting conspiracy theories that call into question whether the CEO is even deceased. The latest online speculation suggests that Quadriga funds have been moved — even though the firm claims they cannot get access.

• Additional reporting by Luke Kawa.

Bloomberg