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He made headlines recently and shocked crypto evangelists and beginners.
This is the seemingly unlikely story that a cryptocurrency exchange can lose access to 190 million Canadian dollars ($ 143 million) of its customer's money.
How did we come here? Who is to blame? And what does this mean for the cryptocurrency sector?
I will try to answer all this in the post below.
QuadrigaCX, what is it?
For those who have not yet heard of QuadrigaCX, it was a major Canadian exchange of cryptocurrency based in Vancouver. Before their collapse, they were one of the most important.
Although the exchange is not one of the most efficient or technologically advanced, more than 100,000 Canadian users of cryptographic systems have made it the preferred operator. They handled an impressive volume for such a low exchange.
The stock market encountered some problems and some warning signs indicated that the operation was not conducted in accordance with best business practices.
In fact, their CIBC bank account was blocked in mid-2018 by $ 25 million. CIBC was concerned that it did not know whether the funds actually belonged to Quadriga. Although these funds were finally thawed, the exchange had to deal with a backlog of withdrawal requests.
These problems grew in size towards the end of the year. Customers started complaining that Fiat's withdrawal requests take forever, but also that cryptographic withdrawals are blocked.
Something was happening and that Crypto Canary in the coal mine had been dead for a long time.
So, what has happened?
The founder and CEO of QuadrigaCX was an individual named Gerald Cotten. He was well known on the Canadian crypto-currency scene and launched QuadrigaCX in 2013.
Gerald has been quoted repeatedly in the press as saying that the company was employing cold room when it came to managing their vast cryptocurrency reserves. For those who do not know, cold storage keeps parts in an off-line and secure state, so they are out of the reach of hackers.
When most people heard this explanation of "cold storage," they assumed that QuadrigaCX was using a multi-signature portfolio system with at least one Key 2 of 3 authentication. This would mean that Gerald held one of the keys and that two other people at Quadriga owned the rest.
This would have the advantage that even if one of these keys was lost, the other two keys could be used to unlock the funds. This is a fairly standard operating procedure in any cryptocurrency business.
There is only one real problem with that …
Gerald Cotten ran a single-key authentication scheme and he was the single holder of this key. He was also the only person who knew the password or the keywords to access these portfolios.
Gerald also decided to travel to India in December of last year while suffering from Crohn's disease for a long time. During the trip, Gerald became ill and was hospitalized. Unfortunately, he died of complications related to the disease without anyone knowing how to access cold portfolios.
He literally took money on his grave.
What followed
As expected, the news shocked most people.
At first, the cryptocurrency media the company had filed to protect itself from creditors and which had been decommissioned were affected. Then the news was spread that the CEO had died with the private keys. The reaction of some industry veterans, such as the CEO of Binance, is revealing.
It's sad. There are many ways to split private keys or sign up to 3/5, 5/7, etc. Never neglect security.
Similarly, never let the CEO carry private keys. Bad on many levels.
Personally, in good health and with the intention of living longer and prospering. Thanks for asking. Stay #safu. https://t.co/4uPQnXNN2D
– CZ Binance (@cz_binance) February 2, 2019
How could an exchange of this size use an amateur portfolio management protocol? How can a CEO with more than 130 million dollars of cryptocurrency easy to steal go to India with the primary key?
Indeed, there were a number of theories as to whether he was really dead and whether Quadriga was facing problems before his death. Questions were also asked about Quadriga's other founders and their role.
I will not go into all these theories at the moment, but there is one thing that is clear from this debacle: it has hindered the adoption of crypto.
The cover exploded on all major media. Around the world, people have been informed that a not regulated Cryptocurrency trading does not really have cold storage protocols prescribed by the government.
For those who were thinking of investing in cryptocurrency, they would probably think twice. For those who were convinced that cryptocurrency was a "scam", they now have some work to do.
Not your keys, not your crypto?
While most encryption users know the dangers of leaving money in the stock market, many thought they could trust QuadrigaCX. Some simply considered the possibility of moving funds and were trapped.
As more and more victims begin to tell the story of their losses, it is certain that this will have an additional impact on the state of mind of those considering an investment.
What will happen?
Since QuadrigaCX was not regulated, it's hard to see exactly how Canadian government agencies will get involved.
The British Columbia Securities Commission (BCSC) claims that this is not part of their oversight as the company has not sold any registered securities. The Ontario Securities Commission said it was looking into the issue, but it was unclear what it could do to recover funds.
Depending on the possibility of a possible investigation by the federal police, the exchange is not the subject of any investigation by the RCMP.
Indeed, this legal vacuum has created some problems for those who have lost funds on the stock market. A number of civil lawsuits have been filed against QuadrigaCX, but given the protection afforded them against creditors, the battle will be tough.
Some of the most important things that can come out of this debacle are what it could do for a common sense long-term trade regulation.
Potential regulation?
While regulation is often considered a dirty word by many of the most ardent supporters of crypto, it could have helped to avoid the circumstances that led to it.
If there was more control over actual trading on the stock market, it is unlikely that the CEO would have been as jaded with regard to the management of the company. There would have been more transparency about their funds and their reserves.
Failure to comply would have resulted in penalties and a clearly defined protocol to follow in the event of the death of the CEO.
In addition, if there was any suspicious case on the stock exchange prior to its collapse, a government regulator could have detected it and taken corrective action before the users were injured.
Most crypto maximalists believe that they do not need the government to occupy the markets of the wild West. However, if you were simply caught in the mess of QuadrigaCX by simple circumstances, your view would probably change quite quickly.
Silver Lining to Crypto Clouds
Although this seems to be bad for the crypto industry in the short term, it could herald some of the long-term changes that are needed for the industry.
Common sense regulations will probably clean the area, eliminate the many "dubious" exchanges and other opaque entities that operate in the space. These could also be associated with other proposed regulations in the STO space, for example.
If regulators are able to create a sense of control over a sometimes anarchic industry, it is likely that this will allay the lingering fears of potential users. Millions of users are sitting on the fence waiting for confirmation to dive into the encrypted waters.
It's actually something that has happened in Japan under the fallout of Mount Gox. hack. Local regulators then decided to legislate on the registration of a cryptographic exchange. The result is a crypto-currency industry in full swing.
As for the current users of Quadriga, one can only hope that they will be able to recover funds. Civil lawsuits could begin suing operators or they could try to recover funds from Gerald Cotton's estate.
There is also quite a bit of money that is tied to a few payment processors. If the courts are able to prove that these funds belong to Quadriga, they can be recovered.
This story will undoubtedly remain in the annals of the history of Bitcoins, like that of Mt Gox et al. And, something tells me that, like Gox, we only heard the beginning …
Image selected via Fotolia and QuadrigaCX
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