Judge reschedules Reggie Fowler’s trial for next year

reggie-fowler-1Reginald Fowler stood before a New York judge Thursday and pleaded not guilty to wire fraud. The new charge brought the total counts against him to five. An irked-looking judge agreed to move the trial date, originally set for next month, to Jan. 11. (Court doc.)

The wire fraud charge was added in a superseding indictment on Feb. 21. The Arizona businessman and ex-NFL owner had already pleaded not guilty to the four prior counts, which had to do with bank fraud and illegal money transmitting. He was looking at a trial date of April 28.

However, with the new charge piled on, Fowler’s lawyer James McGovern wanted more time to prepare. Matthew Lee of Inner City Press, live-tweeted Fowler’s arraignment in court today.  

“The trial is scheduled. Mr. Fowler did not plead guilty. Now he wants an adjournment of the trial,” said U.S. Attorney Jessica Fender, according to Lee’s account. 

Judge Carter granted the adjournment and offered Oct. 28 as a new date for the trial. But Fender turned it down saying her colleague was unavailable at that time.

“Really? A prosecutor not being available is not grounds under the Speedy Trial Act,” said Judge Carter.

Finally, a new date of early next year was settled upon — and the judge appeared irritated with the government, Lee told me.

The law moves slow

Nothing is happening fast in this case. But the right to a speedy trial isn’t for the benefit of the public — it’s for the benefit of the defendant, who can waive it. And since Fowler is free on $5 million bail while he awaits trial, he can afford to do that. After all, he could find himself behind bars for many years after the trial.

Fowler was originally indicted on April 30, 2019, along with Israeli woman Ravid Yosef, who remains at large. The pair allegedly ran a shadow banking service on behalf of Crypto Capital Corp, a Panamanian payment processor that counted Bitfinex and the failed QuadrigaCX cryptocurrency exchanges as customers.

A plea deal would have seen three out of four charges against Fowler dropped. The deal was conditioned upon him forfeiting $371 million* allegedly tied up in some 50 bank accounts, but he wouldn’t—or couldn’t—agree to that.

After Fowler turned down the plea deal, federal prosecutors heaped on the newest charge of wire fraud. The fifth count was no surprise. In a court transcript filed in October 2019, Assistant U.S. Attorney Sebastian Swett told Judge Carter:

“We have told defense counsel that, notwithstanding the plea negotiations, we are still investigating this matter, and, should we not reach a resolution, we will likely supersede with additional charges.”

Fowler, who resides in Chandler, Ariz., will likely go about his daily life until next year when his trial begins. Is he rattled by any of this? Who knows. This is a man who has plenty of experience dealing with lawyers and judges. In 2005, ESPN reported that he had been sued 36 times.

Updated (3/7/20) to add names of attorneys.

*Updated (3/5/20 at 11:30 p.m ET) to note that Fowler’s proposed plea deal was based on him forfeiting $371 million, not $371,000 as previously stated.

We’re in Vancouver for a Quadriga documentary

Well, it’s finally happening. I’m in Vancouver with David Gerard, my mentor and the person responsible for turning me into a bitter nocoiner. If it weren’t for him, I would be doing something productive and useful with my life. Instead, I’m writing about crypto for my blog. Next thing you know, I’ll be a Wikipedia gatekeeper.    

This is my first time meeting him in the flesh. I flew in from Boston Saturday with a layover in Toronto, and almost as soon as I got here, David — who arrived several hours earlier on an eight-hour direct flight from London — met me in the hotel lobby. He was everything I pictured — six-foot-four-inches tall, legs a mile long, says “fuck” a lot and likes to drink beer. Naturally, we made a bee-line to the bar.  

20200223_100227We’ve both come here to be interviewed for a documentary on failed Canadian crypto exchange QuadrigaCX. I initially met with filmmaker Sheona McDonald last year in Nova Scotia — after a harrowing drive through a blizzard to attend a Quadriga court hearing — so the plan to bring me and David together has been in the works for nearly a year.

The documentary is for CBC, Canada’s national public broadcaster. We aren’t sure when it will be out, but Sheona tells us the film may be in a few festivals first before it’s on TV.

IMG_3027 (1)It’s been a tight schedule this weekend. After a long day of travel, this morning, we went to this cool loft in downtown Vancouver for the filming. I was on the hot seat first, followed by David. As it turns out, talking for two-hours is really exhausting, especially when you’ve had only a few hours of sleep.

But this is exciting stuff, and it’s great to be able to hash over the details on what went on inside Quadriga with David. Sheona keeps asking us if we think Gerald Cotten, Quadriga’s cofounder who supposedly single-handedly drove the exchange to insolvency after February 2016, is really dead. David is split 50/50, but I’m leaning toward, no that’s not his body buried in Nova Scotia.

This evening, we got to meet up with fellow journalist and Vancouver local Cali Haan for a nocoiner convention at Starbucks and later for a beer.

We have more filming ahead Monday. While today we were interviewed separately, tomorrow Sheona will shoot us in a coffee shop, sharing ideas about what we think happened with Quadriga. And then after that, it’s off to the airport.

See also David’s post.

Want to learn more about Quadriga? Read the timeline.

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Reggie Fowler allegedly funded sports league with ill-gotten gains

A superseding indictment filed with the SDNY court Thursday includes a new charge of wire fraud for ex-Minnesota Viking co-owner Reginald Fowler.

Fowler, who is living in Chandler, Ariz., while free on $5 million in bail, currently faces four other charges related to bank fraud and operating an illegal money transmitting business, so this makes for count number five.

According to federal prosecutors, from June 2018 to February 2019, Fowler obtained money through “false and fraudulent pretenses” to fund a professional sports league in connection with his ownership stake in the league.

imagesWhat sports league would that be? The indictment does not tell us. But Fowler invested $25 million in the Alliance of American Football — an attempt to form a new football league — right before its inaugural season and shortly before his arrest on April 30, 2019.

The league ran into problems after withdrawals from Fowler’s domestic and foreign accounts were “held up around Christmas,” freezing a principal source of the league’s funding.

Shortly before then, the Department of Justice froze five U.S. bank accounts—three of them were Fowler’s personal accounts and two were held under Global Trading Solutions LLC, a shell company that he set up.

Global Trading Solutions LLC has been directly linked to Crypto Capital Corp., a Panamanian shadow bank used by Bitfinex and the failed Canadian crypto exchange QuadrigaCX.

Due to money problems, the AAF collapsed on April 2, 2019, and filed for Chapter 7 bankruptcy two weeks later. The league claimed assets of $11.3 million and liabilities of $48.3 million and held just $536,160.68 in cash.

After forgoing a plea deal last month, Fowler is set to go trial on all five counts on April 28.

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Personal update: I left my job at Modern Consensus

I’ve stepped down from my role as senior editor of Modern Consensus. It was a matter of not seeing eye-to-eye with my direct report. I tried hard to resolve the situation, but ultimately, I made the decision to leave.

It was not an easy decision to make. I did not have another job lined up. I wasn’t sure where the money would come from. Like everyone else, I have bills to pay, and life in these modern times isn’t cheap. When I explained my quandary to another woman writer, whom I admire greatly, she told me: “Have faith in yourself.” And so, I chose to believe that things will turn out for the best.

What’s next? I’m going to keep writing, obviously. I will write for my own blog because I enjoy it immensely. I’ll write for other publications when I can. I’m open to any and all freelance work. If you have a project you need help with, my Twitter DMs are open, or you can reach me here. I’m also starting up my Patreon account again, so if you want to support my work, you can subscribe for as little as $5 a month.

In the short term, however, I am going to take some time off. I always work hard, but I’ve worked especially hard the last year. When I wasn’t working long days, I was worried about work or thinking about going back to work. I look forward to enjoying leisurely cups of coffee in the morning, going on long walks, and focusing on my yoga.

Silhouette of Girl Leaping Over Cliffs With Sunset Landscape
This is me taking a leap of faith.

 

Documents point to QuadrigaCX using payment processor Crypto Capital

Last month, Miller Thomson, the law firm representing Quadriga’s former users, asked creditors for help in identifying if the failed Canadian exchange had used Crypto Capital Corp, a payment processor that is allegedly missing some $850 million

In a letter posted on its website on Jan. 22, the law firm said that it had received information that Quadriga had used a “Panamanian shadow bank” in the final quarter of its operation—presumably, that means September thru December 2018, since the exchange went belly up in January 2019.

Specifically, the law firm asked creditors to forward any emails or financial statements with names of people or companies linked to Crypto Capital. It offered a lengthy list that included Global Trading Solutions LLC and Global Trade Solutions AG.

The former was a shell company in Chandler, Ariz., set up on Feb. 14, 2018, by Reggie Fowler, one of the individuals alleged to have connections to Crypto Capital. The latter was the Swiss parent company of Crypto Capital. (The firm was cited as a parent company on Crypto Capital’s website.)

Screen Shot 2020-02-13 at 8.14.16 AM

Also, in a December 2018 letter published on this blog, Crypto Capital boss Ivan Molina wrote that “Global Trade Solutions AG and related entities” were being denied banking in the U.S., Europe and elsewhere as a result of financial crimes investigations. Molina was arrested for money laundering last year.

What about GTS Germany?

Global Trade Solutions Gmbh is not on Miller Thomson’s list. I can’t find it on any legal or court docs either, but someone posted on Reddit a year ago that they had received their Crypto Capital withdrawals from the company. 

The sole officer for Global Trade Solutions Gmbh is Ralf Hülsmann, who started on June 15, 2016. Researcher Robert-Jan den Haan found the German public registry for the company, and it is clearly associated with Spiral Global Trade Solutions AG, which is directly linked to Fowler.

Spiral Inc. is a holding company Fowler set up in 1989. At one time it held more than 100 businesses. He also owns Spiral Volleyball.

Screen Shot 2020-02-12 at 11.15.44 PM

Links to Quadriga

Two documents recently shared by individuals on Telegram claiming to be Quadriga creditors show funds sent to Global Trade Solutions Gmbh

On June 28, 2018, one creditor wired $50,000 CAD from the Royal Bank of Canada in Toronto to an account at Deutsche Bank in Germany belonging to Global Trade Solutions Gmbh.

“I should have followed my gut feelings when I was at the bank making this wire transfer,” the user told me. “I just had a very shady feeling.”

Screen Shot 2020-02-11 at 6.54.47 PM

Another creditor shared the following document on Telegram. Similarly, it shows funds being sent to a Global Trade Solutions Gmbh account at Deutsche Bank. The transfer appears to be going out from a bank in Toronto, but there is no date on it.

Screen Shot 2020-02-11 at 8.01.17 PM

Other evidence

There is other evidence to support Quadriga using Crypto Capital. At one time, the payment processor listed Quadriga on its website as a client. Gerald Cotten, the exchange’s now-deceased founder also admitted to using it in the past.

In an email to Bloomberg News on May 17, 2018, he wrote: “Crypto Capital is one such company that we have/do use. In general it works well, though there are occasionally hiccups.”

Assuming Quadriga did use Crypto Capital, the only question that remains is, was the payment processor holding any Quadriga funds when the exchange went belly up? (Remember, Quadriga didn’t keep any books, so it’s up to Miller Thomson and court-appointed trustee Ernst & Young to piece things together.) And if so, is there any chance in hell of getting those funds back?

(Read my complete Quadriga timeline to dig in deeper.)


Updated on Feb. 19 to add Ralf Hülsmann and link to someone on Reddit who said they received CCC withdrawals via Global Trade Solutions Gmbh. 

Updated on Feb. 13 to fix typo — Global Trade Solutions AG, not Global Trading Solutions AG — add a screenshot from Crypto Capital’s website and mention missing $850 million.

 

News: Crypto Mom wants to give criminals a head start, IOTA’s meltdown, Lubin’s organism divides

As a reminder, I will be traveling to Vancouver on Feb. 22 to spend about a day and a half with David Gerard. We are being interviewed for a QuadrigaCX documentary. I know when we get there, we are going to wish we had more time to hang out and meet people in the area. Especially given how far Gerard has to travel (from London) and how beautiful Vancouver is. And with that, here is the news from the past week.

Crypto Mom wants to give criminals a head start

SEC Commissioner Hester Peirce (aka “Crypto Mom”) has unveiled her proposal to create a “safe harbor” for crypto startups, allowing them a three-year grace period after their ICO to achieve a level of decentralization sufficient to pass through the agency’s securities evaluations, specifically the Howey Test. (My story in Modern Consensus.)

Where to begin? Given that most, if not all ICOs are illegal securities offerings, this is like giving fraudsters free reign, so they can pump up their coins, cash in and leave the country. It’s like 2017 all over again. This whole notion of “sufficiently decentralized” is something that first came in mid-2018 when Bill Hinman, the SEC’s director, division of corporate finance, mentioned it in a talk he was giving about Ethereum. There is no clear way of defining “sufficiently decentralized.” It’s a murky concept to begin with. (See David Gerard’s story on Peirce. He goes into more depth and is not nearly so kind.)

Peirce is a Republican with libertarian leanings. Her term expires June 5. With a proposal like this and a nickname “Crypto Mom,” I can only assume she is buttering up for her next gig? Also, the odds of this rule passing are slim to none, especially given SEC Commissioner’s Jay Clayton’s strong criticism of ICOs in the past. 

IOTA’s meltdown

IOTA is in full meltdown mode. Apparently, IOTA founders Sergey Ivancheglo (aka Come-from-Beyond) and David Sønstebø were working on a ternary computing development project called Jinn. But it fell apart, and now the two can’t stop pointing fingers at each other. Ivancheglo says that he no longer works for foundation director David Sønstebø and is suing him for 25 million MIOTA (~ $8.5 million). Sønstebø wrote this really long Medium post, which I had trouble staying awake through. There is also a r/buttcoin Reddit post that spells out the full drama, if you’re in need of entertainment.

Given the maturity level demonstrated by this project in the past, I’m not surprised by any of this. The project has been a complete mess ever since they tried to roll their own crypto in 2017. I wrote about it for Forbes, and they attacked me with weird blog posts and other nonsense. Cofounder Dominik Schiener even threatened to slap me. And when confronted, he accused me of “leading the FUD race.” FT Alphaville actually covered this in a story titled “FUD, inglorious FUD” at the time. 

Researcher Sarah Jamie Lewis is calling on some journalist somewhere to do a deep dive on this sketchy project. “At a glance it’s really hard to not come to the conclusion that there is rampant criminal fraud afoot,” she said in a Twitter thread.

Ripple perpetual swaps

Bitmex has announced trading of XRP perpetual swaps. Bitmex co-founder Arthur Hayes apparently believes XRP is lowly enough to trade on his exchange. Boo-yaka-sha!

Speaking of Ripple, XRP lost almost half of its value last year. It’s a touchy topic for Galaxy Digital CEO Mike Novogratz, because he has invested $23 million into the coin. He recently told a group of financial advisers in Orlando that XRP will “underperform immensely again this year.” He suggested it’s because Ripple owns a giant pool of the coins and keeps selling them off in a situation he likened to shares. (CoinDesk)  

The total amount of XRP in circulation is 100 billion tokens. While Ripple was “gifted” 80 billion, its holdings are down to 56 billion, most of which are in escrow. The company unlocks one billion XRP each month, sells a portion and puts the rest back in escrow. Does that sound like shares to you?

Mastercard dumps all over Libra

Mastercard was one of several payments companies (along with PayPal, eBay, Stripe, Visa, Mercado Pago) to pull out of the Libra Association in October. In an interview with the Financial Times, Mastercard’s CEO Ajay Banga revealed why.

First, Libra Association’s key members refused to commit to avoid running afoul of local KYC/AML rules. Banga would ask them to put things in writing, and they wouldn’t. Second, he didn’t understand what the game plan was for making money. “When you don’t understand how money gets made, it gets made in ways you don’t like.” Finally, the financial inclusion bit struck him as odd. “I’m like: ‘this doesn’t sound right,’” he said.

This gives us a bit of insight into the lack of thought and planning Facebook put into its Libra project before going public with it. You would think a huge enterprise like Facebook would get this stuff right, but apparently not.

ConsenSys splits in two

images (1)Joe Lubin’s organism (that’s what he used to call it, an “organism) looks to be running into more funding trouble, so it’s going to spin off its venture arm. The company will basically become two separate businesses, a software business and an investment business. In the process, it’s also  cutting another 14% of its staff. This is after cutting 13% of its staff in December. (My story in Modern Consensus.)

At one time, ConsenSys had 1,200 employees. In mid-2018, it reportedly had 900. About 117 were let go in December, and likely another 100 in this last round. This is a company that midwifed many of the ICOs that fueled the 2017-2018 crypto bubble. I can still recall going to ConsenSys’ Ethereum Summit on a sweltering day in May 2017 and watching some guy on stage strip down to his boxer shorts. Such was the exuberance at the time.

ConsenSys now lists only 65 companies in its investment portfolio. When Forbes wrote this scathing article in late 2018, the company had 200 startups. Lubin’s science experiment is starting to unravel.

Justin Sun finally breaks bread with Buffet

On Thursday, Tron CEO Justin Sun tweeted a receipt and pictures to show he finally dined with Warren Buffet. This, after paying $4.6 million in a charity auction last year to have lunch with the multi-billionaire. They were originally supposed to meet in San Francisco six months ago, but Sun postponed. This time they had dinner on Buffet’s home turf in Omaha, so Buffet clearly learned his lesson. Other guests were Litecoin’s Charlie Lee, Huobi CFO Chris Lee, eToro chief Yoni Assia, Binance Charity Foundation Head Helen Hai. The bill was for $515 and Buffet left a $100 tip. (Modern Consensus.)

Craig Wright’s abuse of privilege

Craig Wright, the self-professed creator of bitcoin, is driving the attorneys representing Ira Kleiman and the judge bananas. In a document filed with the court on Feb. 2, plaintiffs claimed that Wright has asserted privilege over 11,000 company documents. That is only part of the problem, they said. “The vague descriptions of what is being withheld makes any meaningful analysis on a document by document basis impossible.”

Wright has also apparently claimed that the” bonded courier” is an attorney and any communications with this person of mystery is privileged as well. (Modern Consensus.)

Altsbit gets hacked

Exchange hacks are extremely rare. We don’t hear about them too often, only once every few weeks or so. The latest victim is a small Italian exchange called Altsbit, which had its hot wallet vacuumed clean last week.

This was especially bad for Altsbit, because for some inexplicable reason, the exchange was keeping almost all of its funds in its hot wallet, which is a terrible idea. Most exchanges keep the majority of their funds in offline cold storage for security purposes.

According to reports, the hackers stole 1,066 Komodo (KMD) tokens and 283,375 Verus (VRSC) coins. The combined value of both stands at about $27,000. That’s small potatoes compared to other exchange hacks, where hundreds of millions worth of coins have gone missing. Almost all of Altsbit’s trading activity was coming from the ARRR/BTC pair. (ARRR is the native token of the Pirate Chain.) Altsbit said in a tweet on Feb. 5, it was investigating details of the hack and would get back to everyone soon, but so far nada. The exchange was founded in April 2018.

Bakkt gets into payments

Bakkt, the ICE-owned bitcoin options and futures exchange, isn’t making any money on bitcoin options, but that’s okay because it has another plan. It’s going into payments. The exchange is set to acquire loyalty program provider Bridge2 Solutions. The master plan is to integrate reward points, crypto, and in-game tokens into a single app, so consumers get an aggregate view of their digital assets. Eventually consumers will be able to spend those as cash via the Bakkt mobile app. But for that to happen, Bakkt will have to invest copious amounts of money into marketing to get merchants to adopt the new system of payment. (My story in Modern Consensus)

Other news

What’s happening with Jae Kwon? As Decrypt reported on Jan. 31, he stepped down as CEO of Cosmos to work on a project called Virgo with lofty aims. Cosmos pulled in $17 million in an ICO in 2017. Now Kwon is tweeting under three different monikers and the people within his company have come to find his behavior untenable. (Coindesk)

U.S. Marshalls is auctioning off $40 million of bitcoin (~4,041 BTC) on Feb. 18. (Coindesk.) If you want to put in a bid, you’ll have to deposit $200,000 in advance. Here is the registration form for anyone interested.  

Another study has come out showing that proof-of-stake is just as costly as proof-of-work. But instead of contributing to global warming, PoS requires stakers to put down tokens, lots and lots of them. It’s more evidence that blockchains aren’t economical.

If you have comments or feedback on this newsletter or a tip, drop me a line or DM me on Twitter at @ahcastor.

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News: Crypto Fyre Fest collapses, Virgil Griffith pleads not guilty, lawyers push to exhume body of Quadriga’s dead CEO

Only three weeks to go before David Gerard and I meet up together in Vancouver for work on a QuadrigaCX documentary. I hope the jet lag doesn’t take too much out of him. (He’s traveling from London.) I want to see what happens when he has a few drinks.  

Massive Adoption
(Photo: @crypt0fungus)

The comedy gold medal of the week goes to Massive Adoption, a bitcoin conference that’s now being called the Fyre Festival of crypto because of the packages sold. Jacob Kostecki promised roundtrip flights, hotels and parties for $300-$400. In a shock to all (note the sarcasm), he called the whole thing off. But don’t worry, your refunds are coming. It may take months, but they’re coming. Promise. I swear. So sorry about all this.

David Gerard was the one to originally report on #CryptoFyreFest. I wrote two stories for Modern Consensus on the topic. You’ll find them here and here.  

Our friend Jacob appears to have alienated more than a few casual strangers on the internet. His own brother Jedrek has been speaking out about him on social media. According to Jedrek, Jacob has left a trail of debt and broken promises behind him. And yes, Jacob confirmed to me in a DM that Jedrek is indeed his brother.

Jacob’s behavior reminds me a bit of Gerald Cotten’s when he was running HYIP schemes on TalkGold: Collect people’s money, and then later, tell them the scheme/event has collapsed. Blame it on something external to your control. (Jacob, for instance, is now pointing fingers at everyone, even me.) Apologize profusely and start issuing refunds in good faith, but slowly and over a long period, until people finally give up and go away. 

Also, I can’t help but notice the strong resemblance of the Massive Adoption logo to that of this media consultancy firm.

Virgil’s pot of gold?

Virgil Griffith, former head of special projects for Ethereum Foundation, pleaded not-guilty on Thursday to conspiring to violate the International Emergency Economic Powers Act. He flew to New York from his parent’s house in Tuscaloosa, Ala., to enter his plea. I guess this means he is planning to go to trial? I have to wonder where all the money is coming from. Brian Klein, Griffith’s high profile L.A. lawyer, has made several trips to New York and these legal services don’t come cheap. Griffith’s parents and sister have already put up $1 million for his bail

Telegram’s ICO investors surface

The SEC alleges that Telegram ran a scheme whereby wealthy investors—including several Silicon Valley heavyweights—would get tokens at a steep discount, then dump them on crypto exchanges to bilk retailers. More of those possible investors are now surfacing in court docs. As reported in CoinDesk, they may include:

QuadrigaCX

The law firm representing QuadrigaCX’s former users are nudging the RCMP to dig up the corpse of Gerald Cotten, the exchange’s dead CEO, to make sure it’s really him and not some random dead guy from India. Everybody is mouthing the word “exit scam,” and this is likely the easiest way to find out. Of course, if the body is exhumed and it’s not Cotten, you can expect a Netflix series soon. (My story in my blog.)

Also, Quadriga’s fifth trustees report is out. Basically, it says that big four accounting firm EY, the collapsed exchange’s court appointed trustee, spent half a million U.S. dollars on fulfilling law enforcement requests in the second half of 2019. The small pile of what’s left of Quadriga creditor’s money continues to shrink. (My story in my blog

Reggie Fowler and the mysterious sealed document

Alleged Bitfinex money mule Reginald Fowler was supposed to plead guilty to one count and have the other three counts dropped. But something weird happened when the Arizona businessman stepped before a New York judge on Jan. 17. According to Bloomberg, Fowler was supposed to surrender ~ $371 million in more than 50 accounts. The deal fell apart when he only agreed to forfeit whatever was in the accounts.

Now, according to a Jan. 31 court filing, the U.S. Government has officially withdrawn its plea offer. Nobody knows the full details of what happened that day, but a mysterious sealed document, which appeared in his court filings on Jan. 30, might contain some clues. His trial begins April 28. 

Screen Shot 2020-02-02 at 3.09.31 PM

Spammers gonna spam

In part two of “Decred fires its publicist because Ditto PR could not get the altcoin project a Wikipedia page” David Gerard, who happens to be a longtime Wikipedia administrator, fires back. He wrote an entire blog post calling Ditto out on their no-coiner conspiracy claims. (Ditto originally alluded to Gerard in saying that “a few influential no-coiners have admin power and are intentionally censoring crypto pages.”) He also wrote an article on Wikipedia Signpost, where he talks about the “ongoing firehose of spam” Wikipedia has had to put up with following the 2017 crypto bubble.

Wikipedia has set rules governing what stays up on the site and what gets taken down, and those rules have nothing to do with the site’s administrators. Ditto should know this, as opposed to hiding behind some mad-capped nocoiner conspiracy theory.

Bakkt is a ghost town

The hope was that bitcoin options would lure institution money into the space and send the price of bitcoin through the atmosphere. The unfortunate reality is that literally, no one is trading Bakkt’s bitcoin options. (The bitcoin futures exchange is governed by the Intercontinental Exchange, the owners of the New York Stock Exchange.)

In the last full trading week of January, not a single bitcoin options contract was traded on Bakkt, Coindesk reported. Bakkt launched the first regulated bitcoin options contract on Dec. 9, having rolled out a cash-settled futures and physically settled futures in November and September, respectively. 

Other news

Chainalysis released a report on criminal uses of cryptocurrency in 2019. As long as you overlook some of the marketing fluff—e.g., 60 million Americans bought bitcoin last year—there’s some interesting takeaways. Like the bit about how crooks seem to cash out their bitcoins via over-the-counter trades going through Binance and Huobi. And how, for the first time in Bitcoin’s history, black market sales in crypto surpassed $600 million last year. (See my story in Modern Consensus.)

There’s been more than one news report claiming coronavirus is good for bitcoin. This is utter nonsense. The reason the price of bitcoin goes wildly up and down is because the markets are thinly traded, making them easy to manipulate. Literally, every time there is a crisis happening somewhere in the world, bitcoiners claims that’s good for bitcoin. 

Far right website @Zerohedge had their Twitter account suspended. They always post wild stuff, but apparently, they crossed a line. Buzzfeed said the site claimed without evidence that a scientist at the Wuhan Institute of Virology created the strain of the virus that has led the World Health Organization to declare a global health emergency.  

Bitcoin core developer @LukeDashjr weirdly commented on Twitter that “Masturbation is a very grave sin, arguably even worse than murder.” I thought he was joking, but apparently, /r/buttcoin has an entire collection of his bizarre quotes.

(Updated Feb. 3 at 9 a.m. ET with a few more details on Fowler.)

 

 

 

 

 

 

Law firm for Quadriga creditors puts pressure on RCMP to dig up Cotten

cottenMiller Thomson, the law firm representing Quadriga’s 76,000 creditors, is ramping up pressure on the Royal Canadian Mounted Police to dig up the body of Gerald Cotten, the deceased founder of the failed Canadian cryptocurrency exchange.

Spring is just around the corner. That means the ground in the cold north is going to thaw, and so will the body of Cotten—or whoever that is buried six feet under—putting it at risk of further decomposition. Time is of the essence!

Miller Thomson originally sent a letter to the RCMP at their headquarters in Ottawa on Dec. 13 asking that they exhume the body of Quadriga’s former CEO pronto. They also requested a post-mortem autopsy to identify if that is truly his body and to determine the cause of death. Apparently, no action has been taken yet. 

So on Tuesday, Quadriga’s court-appointed counsel dashed off a letter to the Honorable Bill Blair, Canada’s Minister of Public Safety and Emergency Preparedness, who is the person responsible for the RCMP. Miller Thomson explained all of this in a separate letter that it emailed to Quadriga’s creditors and posted on its website the same day.

Miller Thomson said that it asked Blair to give them an update on whether the RCMP will conduct an exhumation and post­mortem autopsy on the “alleged” — this is the language they are using now — body of Cotten prior to Spring 2020. 

Miller Thomson also gave out Blair’s email, so that Quadriga creditors could contact him “if they have further questions about the RCMP’s management of this file.”

What this means is, Blair will probably wake up Wednesday to hundreds of angry emails from people who have serious doubts as to whether Cotten is really dead. The law firm also suggested creditors contact their local members of parliament.  

I reached out to Blair for comments. It’s too late for him to respond now, but if he writes back, I’ll post his comments here.

Cotten died in Rajasthan, India, at the age of 30, from complications to Crohn’s disease. His body was embalmed in India before it was repatriated to Canada. The closed-casket funeral service took place at J.A. Snow Funeral Home in Halifax, Nova Scotia, on Dec. 14, 2018—the date he was laid to rest. 

(To learn more about the Quadriga scandal, read my full updated timeline.) 

Photo: YouTube/Decentral

 

 

 

Personal update: My new gig at Modern Consensus

As most of you already know by now, I started a new job at the beginning of the month. I’m now senior editor at Modern Consensus. On Jan. 3, my second day on the job, I smashed my right index finger in my car door, and ended it up in the ER twice, first to stitch up the finger, and again to stop the profuse bleeding. 

ENXP84cXsAAYL1uIt was a bad smash. Early in the morning, after only a few hours sleep and a grueling yoga class, I stopped at a dog park. My dogs dashed out of the car, and as I was watching them, worried about coyotes, other dogs and cars in the vicinity (predators loom large in a tired mind), I wasn’t watching the finger, so I closed the door on it. My finger was so stuck in there, I had to actually pry open the door to get it out. 

The finger is much better now, though still numb at the tip. But the good news is I can type with all my fingers again. No more hunt and peck, which is why I’m finally writing this update now. 

Previous to Modern Consensus, I worked seven months for an ATM publication. Some of that was interesting. I was learning about cash and the world’s move away from cash. I got to cover bitcoin ATMs and the regulation—or lack of—in that space. But on the whole, I missed writing about the crypto space. It kept calling me back. Literally, I was still getting calls from people who knew me from my work around failed Canadian crypto exchange QuadrigaCX

I should mention why I turned to full-time work in June 2019 in the first place. Months prior, with encouragement from prolific nocoiner blogger David Gerard, I discovered the freedom of blog writing. Blogging is great. Nobody steps in to rearrange your sentences, wildly move paragraphs around, cross things out, or stick things in that feel like they don’t belong. (Editors do that kind of thing.) You are your own boss. The problem is, no one is paying you for the work either, so unless you are living out of a van, and don’t have rent or a mortgage, it’s a tough road. (Gerard, by the way, has a full time gig as a system administrator, so blogging is something he does on the side.)

Freelance work, which I’ve also done a lot of, is a tough road, too. A decade ago, you could make $1 a word as a freelance journalist. Now you are lucky to make $0.50. Writing, in general, has become a brutal profession. Nowadays, everyone is competing for clicks and views, and that means SEO and keywords, and at times, sacrificing any sense of individuality. But life is about compromises.

Screen Shot 2020-01-25 at 7.07.56 PMThat said, I am very happy to be working for Modern Consensus. It is a small team, but a small team of very experienced and dedicated journalists, who know their stuff. And if it weren’t for the talented Lawrence Lewitinn leaving that small publication that he cofounded (he’s the one who actually came up with the name “Modern Consensus”) to join CoinDesk, there wouldn’t have been an opening for me fill. Now I get to research and write about crypto and finance and frauds full time until my eyes bleed.  

I still plan to continue writing for my blog though, even if that’s just newsletters and small updates here and there. It’s something I enjoy doing and a chance for me to speak my mind the way I want to.

News: CBDCs are what’s hot, Vodafone pulls out of Libra, more WB21 stuff, Quadriga update

Let me kick off this newsletter with some personal news — I’ll be in Vancouver in the third weekend in February to meet up with David Gerard, the bitter nocoiner we all know and love. We’re both being interviewed for a documentary on QuadrigaCX. It’ll be a quick trip, but I suspect we’ll have enough time for a bottle of champagne, or two. I can’t wait to meet him for the first time in person. Next, on to the news.

CBDCs are all the rage

The big excitement these days tends to be around central bank digital currencies, or CBDCs. Ever since Facebook announced its plans for Libra in June 2019, central banks have been leaping into the digital currency bandwagon, researching the possibility of launching their CBDC.

China wants to be the first advanced economy to launch a CBDC. (Other central banks, such as the Central Bank of the Bahamas and the Eastern Caribbean Central Bank, are well on their way with pilots up and running.) Lawmakers for Japan’s ruling party say they are planning to put a proposal for a digital yen in front of the government next month. (Oops! Apparently, Japan’s legislators are looking to issue a state-backed digital yen, not a CBDC, as I previously thought.) And the Bank for International Settlements says that in three years, one fifth of the world’s population will be using a CBDC. 

What’s a CBDC? While Libra is supposed to be backed by a basket of assets, a CBDC is a  an actual replacement for cash. In other words, it’s legal tender issued and backed by the state’s central bank—not the state itself. This is where things get a bit confusing. 

John Kiff, a senior financial sector expert at the International Monetary Fund, tells me the taxonomy for digital currencies is tricky and some definitions are still a bit fuzzy. He defines a CBDC as “a digital representation of sovereign currency that is issued by a jurisdiction’s monetary authority and appears on the liability side of the monetary authority’s balance sheet.” That should clarify things!

The general idea is, you should be able to use a CBDC to buy movie tickets, pay for groceries or buy a house. The big question here is, why would you want to use a CBDC if your debit card is more convenient and costs less to use? 

Apparently, all this CBDC stuff is nothing new. Aleksi Grym, head of digitalization at the Bank of Finland, said in a Twitter thread that we are going through the third historical wave of digital currencies. During the first wave, in 1993, the Bank of Finland launched a CBDC product called Avant. It was discontinued after 13 years. This February 2000 article in the Economist (paywall) describes the second wave of digital currencies, he said.

Taking us back through time, David Gerard has written a blog post detailing the history of Avant. CBDC advocacy hasn’t changed since the days of Avant, he argues. “CBDCs are the sort of thing the vendor loves — but I’ve yet to see the case for consumers.” Does that mean the debit card will win?  

Another blow to Libra, Tether Gold, Pornhub

Screen Shot 2020-01-25 at 8.31.12 PMVodafone dealt another blow to the Libra project, when it announced on Tuesday it had pulled out of the Libra Association, the independent governing council for Facebook’s planned cryptocurrency. The British telecom giant said that it wants to put the resources it originally intended for Libra into its African mobile money transfer service M-Pesa. The 28 companies originally joining the association had pledged to put in $10 million apiece. Vodafone is the eighth big company to pull out.

You can’t blame Vodafone. Who would want to throw $10 million into a project whose chances of getting off the ground — at least in the format originally intended — are slim to none? Facebook is facing too many regulatory headwinds at this point, and clearly Vodafone doesn’t want to take that risk. 

Elsewhere in the stablecoin world, on Thursday, Tether launched Tether Gold, a stablecoin backed by — you’ll want to sit down for this — real gold. That’s right. No longer do you need to bear the burden of worrying about where to safely store your personal stockpile of gold. Tether will take it off your hands and issue you I.O.U.s in it’s place. Similar to its fiat-backed cousin, Tether Gold is fully redeemable — under certain terms! If you want your full gold bars back, you’ll have to pick them up in Switzerland.  

PayPal stopped supporting payments to Pornhub in November, but that’s okay because now the world’s most popular porn site accepts tethers — the kind that run on the Tron blockchain. The big question here is, what are the webcam models going to do with all the heaps of tether they earn? At some point, they need to convert those to dirty fiat to buy groceries and pay rent. Somehow I don’t think that’s going to be easy. 

More WB21 stuff

I wrote a lengthy story on WB21 (now Black Banx) for Modern Consensus last week. Roger Knox, who was a client of WB21, the payment processor that is allegedly holding $9 million in QuadrigaCX funds, pleaded guilty to running a $165 pump and dump on Jan. 13. Three other individuals connected to the scam have also pleaded guilty. 

  • Matthew Ledvina, a Swiss attorney, pleaded guilty in Boston on Feb. 1, 2019. 
  • Milan Patel, a Swiss attorney, pleaded guilty in Boston on Dec. 3, 2018. 
  • Morrie Tobin, a California resident, pleaded guilty in Boston on Dec. 3, 2018. 

Michael Gastauer, who ran WB21, has not been formally charged, though he was named in the October 2018 civil suit along with Knox. I would assume plans are to indict him as well. It is not unusual for somebody charged by the SEC or law enforcement to cough up information in return for a lesser sentence. So all these guilty pleas probably don’t bode well for him. I’m just not sure if anyone knows where Gastauer is right now. But guessing by some of the schemes he has been involved with, he likely has access to plenty of money. If he is at large, he could stay that way for a while. 

WB21 also allegedly laundered money for cryptocurrency ponzi scheme OneCoin, according to a recent report in Financial Telegram.

Quadriga news

On Wednesday, Miller Thomson, the representative counsel for QuadrigaCX creditors, asked creditors for help in identifying any records — financial or otherwise — related to Crypto Capital Corp.

In a letter (archive) posted on its website, the law firm said it had received information that a “Panamanian shadow bank” may have been a payment processor for the exchange in the final quarter of its operation. In other words, sometime in Q4 2019.

Crypto Capital at one time listed Quadriga on its website as a client. The exchange’s now-deceased founder also admitted to using the firm in the past. In an email to Bloomberg News on May 17, 2018, Gerald Cotten wrote: “Crypto Capital is one such company that we have/do use. In general it works well, though there are occasionally hiccups.”

In other news

On the legal front, in a complaint filed Tuesday, the SEC charged blockchain marketplace Opporty for conducting an unregistered ICO. The company raised $600,000 preselling its OPP tokens to roughly 200 investors in the U.S. and elsewhere. Opporty sold the tokens to wealthy investors via a simple agreement for future tokens, or SAFT contract.  

SAFTs are a bad idea to begin with, but Opporty likely drew even more regulatory scrutiny to itself in describing its platform as some kind of magic do-it-all system. In its offering material, the company described its “ecosystem” as an “online platform that combines a blockchain-powered service marketplace, a knowledge-sharing platform, a system of decentralized escrow and a Proof-of-Expertise blockchain protocol.”

Elsewhere, the Blockchain Association has thrown its support behind Telegram. In a brief filed with the court on Tuesday, the advocacy group sided with the messenger app in the SEC v. Telegram lawsuit. It told the judge that a ruling in favor of the SEC would stifle innovation in the field and hurt investors. Those investors included prominent VC firms Benchmark and Lightspeed Capital, along with several wealthy Russians. Together they put up $1.7 billion in exchange for the promise of future grams. 

The Chamber of Digital Commerce also filed an amicus brief with the court, but with a broader focus, asking the court to come up with a better definition of digital assets.

Plaintiffs in a lawsuit naming Tether have requested the consolidation of three lawsuits claiming that Tether manipulated the price of bitcoin and related bitcoin futures markets. They filed a letter with the court on Jan. 16. Tether seems to be okay with it. 

French officials on Friday filed preliminary charges of money laundering and extortion against Alexander Vinnik, according to a report in the AP. The Russian nationalist was first arrested in Greece in July 2017, after he was accused of laundering $4 billion through the now-defunct exchange BTC-e. Greek authorities ruled that Vinnik should go to France, then to the U.S. and finally to Russia. Vinnik’s not happy about it. He was hoping to go straight to Russia, where he would face lighter sentencing.

Finally, Decred dumped it’s PR agency Ditto PR because they weren’t able to get a Wikipedia page for the project despite getting paid a retainer of $300,000. (It’s not clear if they were paid in DCR or dirty fiat.) Ben Munster covers the story in a hilarious article for Decrypt. And here is the full thread of Decred’s former publicist arguing their case. 

Updated Jan. 26 at 4 p.m. E.T. with a clearer definition of CBDCs and a quote from John Kiff.
Updated Jan. 27 at 10 p.m. E.T. to add a section about Quadriga.

 

Sweet home Alabama — Virgil Griffith free on $1M bail to live with parents

Screen Shot 2019-12-30 at 3.35.28 PMLast week, after a denial of bail, it looked like Virgil Griffith, the Ethereum Foundation developer who was arrested on Thanksgiving Day for allegedly violating sanctions and traveling to North Korea, was doomed to be spending months behind bars awaiting trial.

Now things are looking up. In an appeal of Thursday’s order, a Southern District of New York judge today granted his release pending $1 million bail. He won’t be headed back to Singapore where he lives, though. Instead, he’ll be going to Alabama — or “Sweet Home Alabama,” to borrow from rock band Lynyrd Skynyrd — to stay with his parents for a year, or however long it takes, to sort out the massive mess he’s gotten himself into. 

“We are very pleased the district judge sided with us and ordered Virgil to be released pending trial, Griffith’s lawyer, Brian Klein of Baker Marquart LLP, told me via email. Klein did not comment on how long it would take Griffith to be released from custody. 

Griffith’s sister and parents are putting up their homes to secure the bail, according to a  report by Matthew Russell Lee of Inner City Press — who said in a live tweet thread that he was the only reporter attending Griffith’s hearing today. 

Along with Klein, Griffith’s father sat in the courtroom today, watching the fate of his son unfold. The presiding judge was Vernon Broderick. 

Only four days earlier, in a separate hearing, also reported by Inner City Press, a different judge, Barbara Moses, denied Griffith’s bail. In making the decision, she cited Griffith’s text messages to his parents about renouncing his U.S. citizenship and setting up a money laundering business in North Korea.  

“Laws in this country are not suggestions… Assisting foreign governments with money laundering is illegal,” Broderick told Griffith in court today, according to Lee’s tweets. 

“If you were in North Korea, you wouldn’t be having a bond hearing,” he added. 

Klein pointed out that Griffith is not charged with money laundering, but sanctions violations. Virgil is “verbose and provocative,” he told the judge, according to Lee.

Assistant U.S. Attorney Andrew Krause argued that the prospect of jail time could make Griffith want to flee and that he might have assets out of the country. He pointed out that Griffith had been making plans to renounce citizenship, according to Lee.

Although Griffith had considered renouncing U.S. citizenship, he didn’t do it, Klein said.

In the end, Broderick agreed to the bail. He also ruled that Griffith will be allowed to e-mail with his lawyers, and even use his passport card for travel, once he gets himself an Alabama state identification, according to Inner City Press.

 

News: Ex-employee sues Kraken, Reggie Fowler to change not-guilty plea, Circle sheds another crypto business

It’s the first night of Hanukkah and a few days before Christmas. A lot of folks are off work for the rest of the year, and those still working are barely working. But the news never sleeps, so here’s a roundup of important crypto news from last week. 

kRAKENOn top of the list — an ex-employee is suing Kraken, a prominent U.S. crypto exchange. (Here’s the complaint.) The ex-employee claims the firm fired him for bringing to light illegal business practices. Among his accusations: Kraken used employee addresses to falsify business records and did business with entities on the Office of Foreign Assets Control list of Specially Designated Nationals and Blocked Persons — a big no-no.

David Gerard, who broke the story on Tuesday, summarizes the important details in a blog post. The story has now made it into the mainstream press and could screw up the exchange’s plans to launch a “cryptobank” in Wyoming.

Next up, Reginald Fowler, the ex-NFL owner accused of operating a “shadow bank” that processed hundreds of millions of dollars of unregulated transactions on behalf of crypto exchanges, plans to change his not guilty plea. In a hearing set for Jan. 10, he is expected to plead guilty to at least one of the charges. 

As an aside, previously, I’d heard that the two wealthy friends who put up a substantial portion of Fowler’s $5 million bail in May — back when he entered a plea of not guilty — were Lori Fowler, his ex-wife, and Molly Stark, the club director of Spiral Volleyball, a company he owned. Indeed, here are the court docs with both their signatures on it.

In other news, Coinfloor, the oldest running crypto exchange in London, announced on Tuesday plans to delist ethereum and bitcoin cash. As of Jan. 3, it will only focus on bitcoin. The move comes ahead of the Ethereum 2.0 launch. Being a small exchange, the hassle of dealing with forks was apparently too much for the business to deal with. 

Circle is shedding another crypto business. The Boston firm announced Tuesday that it sold Coin Trade, its over-the-counter crypto trading desk, to Kraken. The move comes after it sold off its crypto exchange Poloniex and co-CEO Sean Neville stepped down. In 2020, Circle plans to focus mainly on stablecoins, or more specifically, its own USD Coin. Leo Jakobson does a nice job covering the story for Modern Consensus.  

The European Central Bank is exploring the use of an “anonymity voucher” to give prospective central bank digital currency users privacy in their retail transactions. Of course! What better way to make it screamingly obvious that you are hiding something than to flag it with an anonymity voucher. I can’t see this being very effective.

Several lawmakers sent a letter to the IRS on Friday asking for clarity on crypto tax laws. Apparently, guidance the IRS issued in October on the handling of forks and airdrops brought up more questions than answers. (Story in CoinDesk.)

Grayscale conducted an incredibly sexist study on women bitcoin investors, which CoinDesk wrote up. According to the study, 93% of women would be more open to buying bitcoin if we only had more educational resources available to us. The big question is, why did Grayscale even conduct a silly study like this? 

FT’s Jemima Kelly has an answer. As she so cleverly points out “… this is of course not about what women want. It’s about what crypto men want, and they want more people to buy into crypto so that their own HODLings can grow more valuable.”  

Finally, Michael Patrick McSweeney, who many of us have long known as Stan Higgins — a pen name he began using when he started working for CoinDesk in 2014 — has landed a new gig as managing editor at The Block. McSweeney left CoinDesk on Oct. 31.  

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News: Quadriga creditors want Cotten’s body exhumed, NYAG/iFinex standoff continues, Bottle Pay shutting down 

I’ve fallen behind on crypto news, mainly because I’ve had this job writing about cash and ATMs for the last seven months. But now I’m trying to get back into it, so here’s a rundown on the news of the week that stuck out. 

Coffin Open

On top of the list, lawyers for QuadrigaCX creditors want to exhume Gerald Cotten’s body. They’ve dashed off a letter to the Royal Canadian Mounted Police seeking a post-mortem autopsy of the body as well “to confirm both its identity and the cause of death.” That sounds horribly gruesome, particularly since, he was buried a year ago. 

He was apparently not cremated. After his death in India on Dec. 9, 2018, his body was embalmed, flown to Canada and buried. No formal autopsy was done, however, so foul play has not been ruled out. Lawyers would like the body pulled from the ground before spring for obvious reasons.

Cotten’s widow said she was “heartbroken to learn of this request.”  

(Read my Quadriga timeline to get up to speed on the details of the now defunct Canadian crypto exchange.)

In other news, the legal standoff between the New York Attorney General’s Office and iFinex, the parent company of Tether and Bitfinex, continues.

In late 2018, the NYAG demanded iFinex hand over documents related to an ongoing investigation of its activities, and iFinex has been trying to avoid doing so ever since.

In August, the court ruled iFinex needed to cooperate. iFinex appealed, and recently, the NYAG filed its lengthy response. The response contains a lot of what we already know, but it’s a good refresher if you want to catch up on the entire saga. You can also read Tether’s response to the NYAG’s response filed on Friday. 

You recall Cryptopia, the New Zealand crypto exchange that collapsed after a $16 million hack in January? Liquidator Grant Thornton released a second report on Wednesday detailing its progress in recovering the funds. So far, it’s recovered NZ$10.9 million ($7.2 million) but reconciling the over 900,000 active customers on the exchange at the time it went belly up in May is proving a gargantuan task. Likely creditors won’t recoup any of their money anytime soon, and let’s not even talk about the legal fees.

In a podcast interview with Eric Weinstein, managing director at Thiel Capital, published Wednesday, Vitalik Buterin casually mentioned how he managed to convince the Ethereum Foundation to sell 70,000 ETH when the coin peaked in late 2017, resulting in $100 million liquidity. ETH would have been valued at around $1,400 at the time — 10x what it’s worth today. It’s good to know the Ethereum Foundation isn’t starving. 

Canadian bitcoin ATM operator Instacoin announced it’s adding support for seven stablecoins  —  including tether. You can buy and sell up to C$10,000 worth of crypto in a day on these street corner exchanges without having to present any form of identification. Can you imagine if Western Union operated in this fashion?

On Tuesday, U.S. prosecutors arrested four men men for allegedly running a $722 million crypto ponzi scheme. From April 2014 through December 2019, BitClub Network solicited money from investors all over the world in exchange for shares of crypto mining pools. In private conversations, the operators called their clients  “dumb” and “sheep” and “idiots.” What do you call people who get caught running these types of scams? 

Shopin founder Eran Eyal pled guilty Thursday to defrauding investors of millions of dollars through three investment schemes, including a $42.5 million ICO. After conducting an unregistered securities offering by selling Shopin tokens in 2017, he never created a functional platform. (Here’s the PR and complaint.)

In a tweet, crypto lawyer Stephen Palley said: “The SEC’s ICO enforcement work has quickly become indistinguishable from other types of enforcement litigation. Crypto’s novelty receives no special treatment. Like any other securities offering — you have to register, you can’t make misstatements, and you can’t misuse funds.”

Singapore-based VeChain Foundation’s buyback wallet was hacked on Friday. According to a report in CoinDesk, VeChain said it is working with cybersecurity firm Hacken to track the movement of VET tokens should the criminals try to cash out. The hacked funds represent a little over 1% outstanding VET, which has a fixed supply of 86.7 billion. VeChain is calling the mistake “human error,” because we’re all only human.

Bottle Pay, a service that once allowed users to send tiny amounts of bitcoin via social media, is shutting down due to new AML regulations in the E.U.  The Fifth Anti-Money Laundering Directive goes into effect in January and expands existing legislation to include the crypto space imposing strict KYC and AML practices. Users have until the end of the month to withdraw their funds. 

Lawrence Lewitinn, former editor-in-chief of Modern Consensus, is now managing editor of markets for CoinDesk. He wrote his first piece about Bitmain’s Texas Hedge. A Texas hedge is a high reward, high risk venture that’s generally a recipe for disaster. Lewitinn does a good job explaining. 

In an article written for The Block, Palley claims that Bitcoin-linked investment scheme known as HEX is not a ponzi, but it’s obviously an unregistered security offering.  

@Cryptodeleted and @Cryptodeleted2 — the twitter accounts that archived deleted tweets — were shut down by Bitcoin maximalists. 

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DOJ arrests Ethereum Foundation coder for teaching North Korea how to launder money, evade sanctions

Virgil MediumWhen you openly defy the U.S. government and travel to North Korea — one of the U.S.’s foremost enemies — to teach crypto and blockchain tech at a conference, you can’t really expect things to go well. I mean, can you?

It’s hard to know then, if Virgil Griffith, head of special projects for the Ethereum Foundation, knew what was about to happen or if he was completely caught off guard on Thanksgiving Day — a day when everyone else in the U.S. was stuffing themselves with turkey, mashed potatoes and gravy — when the DOJ arrested him at LAX.

According to a statement by the U.S. Attorney’s Office for the Southern District of New York, he is charged with violating the International Emergency Economic Powers Act, which prohibits U.S. citizens from exporting goods, services or technology to North Korea without approval from the Treasury Department. The maximum sentence is 20 years.

In April, Griffith traveled to North Korea — or more formally, the Democratic People’s Republic of Korea — to allegedly deliver a presentation and technical advice on using crypto and blockchain tech to evade sanctions at the Pyongyang Blockchain and Cryptocurrency Conference.

That’s a big no-no. In September 2017, the U.S. issued a travel ban to North Korea. U.S. citizens are not allowed to go there without a special validation.

According to the unsealed complaint, Griffith knew full well that it was illegal to travel to the DPRK. He sought permission from the Department of State and his request was denied. Still — and this is the mind boggling bit — he went anyway.

In his presentation at the conference titled “Blockchain and Peace,” Griffith allegedly discussed how a blockchain and a smart contract could be used to benefit the DPRK.

The complaint states:

“At the DPRK Cryptocurrency Conference, GRIFFITH and other attendees discussed how blockchain and cryptocurrency technology could be used by the DPRK to launder money and evade sanctions, and how the DPRK could use these technologies to achieve independence from the global banking system.”

In an interview that took place with the FBI in November, Griffith said the presentation amounted to a “non-zero transfer of technical knowledge” and that the information included “basic concepts accessible on the Internet,” the complaint said. So did he actually “export” any new information to the DPRK? I’m not so sure.

Griffith’s flouting of U.S. laws did not stop there, however. He also allegedly communicated about violating sanctions with a financial transaction.

“After the DPRK Cryptocurrency Conference, GRIFFITH began formulating plans to facilitate the exchange of cryptocurrency between the DPRK and South Korea, despite knowing that assisting with such an exchange would violate sanctions against the DPRK.”

Griffith is presumed innocent until proven guilty. Still, he is in deep water and will need a really good lawyer to dig him out of this mess.

Who is Virgil Griffith?

Labeled an “internet man of mystery” by The New York Times in November 2008, Griffith, 36, has a doctorate from the California Institute of Technology in computations and neural systems and a B.A. in computer and cognitive science from the University of Alabama. He is a U.S. citizen who lives in Singapore.

He is also the founder of a data-mining tool called WikiScanner, which makes it possible to figure out which organization made which edits to a Wikipedia entry by cross-referencing IP addresses with a database of IP address owners.

The NY Times article described him as a “troublemaker” and a “twerp” and said Griffith’s problems with authority emerged early on. He spent several school days in detention. Also, according to the article:

“In his public school, he worried about gangs; his mother pulled him out and briefly homeschooled him. Eventually, he graduated from the Alabama School of Math and Science, even though he once threatened to sue the school — for a proposed policy of mandatory drug testing — and skipped his final exams to travel in Greece.”

Griffith joined the Ethereum Foundation in 2015. In an interview, he told developer Makoto Inoue that met Ethereum Founder Vitalik Buterin pre-Ethereum, which would likely have been sometime in 2014, after Buterin dropped out of the University of Waterloo and started traveling the world to learn more about crypto.

“While I was a graduate student Vitalik slept in my closet for about two months,” Griffith told the interviewer. 

‘But danger is my fetish’

What could Griffith have possibly been thinking to do something so incredibly stupid? He once tweeted, “But danger is my fetish,” so maybe that was the thrill.

For many, Griffith’s actions are a flashback to Ross Ulbricht, the creator of the Silk Road, now serving a life sentence for drug trafficking and money laundering. On Thanksgivings, Ross’ mother puts a plate piled high with food in front of an empty chair at the table. One can’t help wonder if Griffith’s family faces a similar future.

Like Ulbricht, Griffith’s actions appear that of a narcissist thinking he was too special, too clever to get caught. So confident was he that he openly flaunted his trip to North Korea. For instance, on Aug. 13, he literally tweeted a picture of his visa to go there. In another tweet, he referred to the journey as a “Trip of a lifetime.”

I recommend reading Ben Munster’s September story in Decrypt on the upcoming 2020 “Pyongyang Blockchain and Cryptocurrency Conference.” In it, Munster describes the government-sponsored event as offering an “exclusive environment of confidentiality and contacts with the highest government officials and engineers.”

Munster spoke with an attendee of the 2019 conference, who told him that “the main things (the North Koreans) were interested in were using Bitcoin to get around sanctions, and using Ethereum for U.N.-less courts.”  The source went on to describe how North Korea has trouble enforcing agreements outside of its own borders:

“‘Generally they load up Chinese people with millions of dollars in cash [and send them across the border], but half the time, these people just disappear with the money. There’s not much they can do about it.’ As such, North Koreans ‘desperately want a way to have agreements that work outside their own borders,’ he explained. ‘I told them about smart contracts. They were very excited about that.’”

The cryptosphere reacts

A few of the folks in cryptoland appear to be downplaying the seriousness of Griffith’s behavior — some calling the government’s case “misdirected” and portraying Griffith as a sweet guy with the best of intentions.

“Hoping that this concludes quickly, and teaches a valuable lesson to all, but with a minimum of wasted time and effort for Virgil, who is a valuable technical contributor,” tweeted Emin Gün Sirer, a Cornell professor working on his own blockchain protocol.

Crypto lawyer Stephen Palley retorted: “I mean, it’s the Southern District of New York — they are not really in the teaching lessons business.”

One Ethereum developer wondered aloud on twitter if Griffith was trying to teach North Korean citizens with the hope he was “setting them free” from the regime — a humanitarian mission, if you will.

As for the Ethereum Foundation, it issued a formal statement to Vice, saying it was not represented in any capacity at the events outlined in the Justice Department’s filing, and it “neither approved nor supported any such travel, which was a personal matter.”

News: Former Wex CEO arrested, CFTC probes BitMEX, Facebook’s Libra grilled in Washington

Since I’m now the editor of an ATM website, let’s start with bitcoin ATM news. LibertyX is adding 90 machines to its bitcoin ATM network. It now has over 1,000 machines.

Actually, these are not new machines. They are traditional cash ATMs that are bitcoin enabled. A software upgrade on the machines allows users to buy bitcoin with a debit card. The ATMs continue to dispense cash as well. 

According to CoinATM Radar, there are now 5,200 bitcoin ATM machines on this earth. Who the heck is using them? At least one operator, frustrated by a lack of business, has moved his Bitcoin ATM into his mother’s garage. 

In the exchange world —

Criminal in handcuffsDmitri Vasilev, the ex CEO of defunct crypto trading platform Wex, was arrested in Italy. Wex was a rebrand of BTC-e, an exchange that was shut down in 2017 for being a hub of criminal activity. BTC-e was also linked to the stolen bitcoin from Mt. Gox.  

Economist Nouriel Roubini — aka “Dr. Doom” — has stepped up his attack on crypto derivatives exchange BitMEX. In a scathing column in Project Syndicate, Roubini claims sources told him the exchange is being used daily for “money laundering on a massive scale by terrorists and other criminals from Russia, Iran, and elsewhere.” 

Days after Roubini’s column came out, Bloomberg reported that the CFTC was investigating whether BitMEX allowed Americans to trade on the platform. In fact, we know that crypto analyst Tone Vays, a New York resident, was trading on the platform until November 2018 when his account was terminated.

Regulators are cracking down on crypto exchanges. As The Block’s Larry Cermak points out, the situation is getting “quite serious.”

Elsewhere, Bitpoint, the Tokyo-based crypto exchange that was recently hacked, says it will fully refund victims in crypto, not cash. Roughly 50,000 users were impacted when $28 million worth of crypto vanished off the exchange. Two-thirds of the stolen funds belonged to customers of the exchange. 

U.S. crypto exchange Coinbase has killed off its loss-making crypto investment packages. After shutting down its crypto index fund due to a lack of interest, it closed its much ridiculed “Coinbase Bundle.” The product launched eight months ago with the aim of making it easy to purchase a market-weighted basket of cryptocurrencies. 

Malta-based Binance found itself $775,000 richer when it stumbled across nearly 10 million Stellar lumens (XLM). Turns out, the exchange had been accidentally staking (receiving dividends) on its customers lumens for almost a year. It’s planning to give the tokens away in an airdrop and will also add staking support for customers.  

Tether, the stablecoin issued by Bitfinex/Tether, is now running on Algorand, a new blockchain protocol. It’s also running on Omni, Ethereum, Tron and EOS. Presumably, running on a plethora of networks makes tether that much harder to shut down. It’s sort of like whack-a-mole. Try to take it off one network, and tether reappears on another. 

There are now officially more than $4 billion worth of tether sloshing around in the crypto markets. That number almost doubled when Tether inadvertently issued $5 billion unbacked tethers when it was helping Boston-based crypto exchange Poloniex transfer tethers from Omni to Tron. Oops.

Also interesting —

David Gerard is working on a book about the world’s worst initial coin offerings. He recently uncovered another cringe-worthy project. “Synthestech was an ICO to fund research into transmutation of elements, using cold fusion — turning copper into platinum. Literally, an ICO for alchemy. Turning your gold into their gold.” 

Facebook’s Libra had a busy week.

U.S. Secretary of Treasury Steven Mnuchin gave a press briefing on crypto at the White House. (Here’s the transcript.) He is concerned about the speculative nature of bitcoin. He’s also seriously worried Libra will be used for money laundering. He said the project has a long, long way to go, before he feels comfortable with it. 

Unlike bitcoin, which goes wildly up and down in price, Libra would have a stable value, because it would be pegged to a basket of major currencies, like the dollar, euro, and yen. Although, nobody is quite sure how that will work and what currencies it will be pegged to. Tether has a stable value, too, of course.

After his talk, Mnuchin flew off to Paris, where he met with finance ministers from six other powerful countries at the G7 summit. Everyone there agreed they need to push for the highest standards of regulation on Libra. 

Meanwhile, David Marcus, the head of the Libra project, got a grilling in Congress over privacy and trust issues. (You can watch the Senate hearing here and the House Financial Services Committee hearing here.) Nobody believes Facebook will keep its word on anything.

All of this is happening, of course, just after the social media giant got a $5 billion slap on the wrist for privacy violations following the Cambridge Analytica scandal.

The dumb tweet of the week award goes to Anthony Pompliano, co-founder of a digital asset fund Morgan Creek Digital, who says dollars aren’t moved digitally, they are moved electronically. For some reason, he has 250,000 followers on Twitter. The historic tweet even made it in FT Alphaville.

Apple co-founder Steve Wozniak has joined an energy-focused blockchain startup in Malta. The Mediterranean island nation is gung-ho about blockchain. It is also a haven for money laundering and the place where a female journalist who tried to expose government corruption was blown up in 2017. 

U.S authorities have charged former Silk Road narcotics vendor Hugh Brian Haney with money laundering. The darknet market was shut down in 2013. Special agents used blockchain analytics to track down Haney and seize $19 million worth of bitcoin. 

This clever young man has made a business out of helping crypto exchanges inflate their volume. 

ConsenSys founder Joseph Lubin is being sued by a former employee for $13 million. The employer is alleging fraud, breach of contract and unpaid profits.

Former bitcoin core developer Peter Todd is being sued for allegedly touching people inappropriately.

And finally, bitcoin ransomware Ryuk is steadily making its way into China.  

 

 

The HODLcast: “QuadrigaCX with Amy Castor and David Gerard”

Sasha Hodder of The HODLcast interviewed me and David Gerard, author of “Attack of the 50-foot Blockchain,” about collapsed Canadian crypto exchange QuadrigaCX.

Sasha is an attorney with DLT Law Group, P.A., which focuses on supporting crypto-related businesses. David’s work has had a huge influence on me, so you can imagine how much fun I had doing a podcast with him.

QuadrigaCX is the story of how two sketchy characters—one, a convicted felon, and the other, a young man who seemingly had been running ponzi schemes since his teenage years—came together and launched a crypto exchange. A match made in heaven, right?

David and I talk about how this was even possible; the appalling, amateurish way the business was run; and the impact this could have on future crypto regulation.

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News: LEO getting pumped, Cryptopia scrambles to save its data, Poloniex says it’s stopped ignoring customers

This newsletter is reader supported. If you appreciate my work enough to buy me a beer or cup of coffee once a month, that’s all it costs to become a patron. I’m trying to pick up freelance gigs when I can, but one of the joys of writing for my own blog is I can write whatever I want, when I want. On to the news…

Bitfinex and LEO

Screen Shot 2019-05-29 at 5.43.17 PMUNIS SED LEO, the full name of Bitfinex’s shiny new utility token, is in its second week of trading. The price started at around $1, but it’s already climbed to a high of $1.52, according to CoinGecko. I’m sure the price increase is totally organic—not.

There are 1 billion LEO in circulation—660 million issued on Ethereum and 340 million issued on the EOS blockchain. 

Crypto Rank warns that 99.95% of LEO coins are owned by the top 100 holders. Also, Bitfinex still has not disclosed information about the investors. “We consider that the token can be manipulative,” Crypto Rank tweeted.

Given its $850 million shortfall, Bitfinex needs to pull in more money. It recently entered the initial exchange offering (IEO) business. IEOs are similar to initial coin offerings (ICOs), except that instead of handing you money directly to the token project, you give it to the exchange, which acts as a middleman and handles all of the due diligence.

Tethers

As the price of bitcoin goes up—at this moment, it is around $8,730—the number of tethers in circulation is going up, too. There are now more than $3 billion worth of tethers sloshing around in the crypto markets, pushing up the price of bitcoin.

Whale Alert says $25 million worth of tethers were taken out of the supply and put into the Tether Treasury. Kara Haas tells me, don’t worry, $150 million Ethereum-based tethers were just issued, and they more than make up for the difference.

Omni tethers, Ethereum tethers, Tron tethers. Tethers appear to be constantly coming and going, bouncing from one chain to another. It gets confusing. But maybe that is the point—to keep us confused. And to add to the jumble, tethers are now executing on EOS.

In the next couple of weeks, Tether is also planning to issue tethers on Blockstream’s federated sidechain Liquid. And later this year, the Lightning Network.

I updated my recent tether story to note that if you want to redeem your tethers via Tether, there is a minimum redemption of $100,000 worth—small detail. Also, I still haven’t found anyone who has actually redeemed their tethers.

Cryptopia’s data—held to ransom?

Cryptopia filed for liquidation on May 14. Liquidator Grant Thornton New Zealand is now scrambling to save the exchange’s data, held on servers hosted by PhoenixNAP in Arizona. The tech services wants $1.9 million to hand over the data.

Grant Thornton is worried Phoenix will erase the SQL database containing critical details of who owned what on the exchange. It filed for Chapter 15 and provisional relief in the Bankruptcy Court of the Southern District of New York. (Here is the motion.)

According to the motion, Cryptopia paid Phoenix for services through April. But when it offered to pay for May, Phoenix ended the service contract and “sought to extract” $1.9 million from the exchange. Grant Thornton says only $137,000 was due for the month of May. Phoenix also denied the liquidators access to the data.

On May 24, the court granted motion. (Here is the order.) Phoenix has to preserve the data for now, but Cryptopia has to pay $274,408 for May and June as security in the temporary restraining order. 

Meanwhile, Cryptopia liquidators’ first report is out. The New Zealand exchange owes 69 unsecured creditors $1.37 million (these are just the ones who have put in claims thus far) and secured creditors over $912,000, with an expected deficit of $1.63 million.

Turns out January 14, the day Cryptopia suffered its fatal hack was the exact same day Quadriga announced the death of its CEO Gerald Cotten, who, uh, had been dead since December 9. The two defunct exchanges had a few other things in common, which I outline in my first story for Decrypt.

Poloniex 

Living in Cambridge, I found it strange that nobody in the local blockchain community knew anyone who worked at Poloniex, based in Somerville, the next town over. I was told Polo staff kept a low profile for security reasons. But I also wonder if they were trying to avoid pissed off customers, whose inquiries they ignored for months.

When Circle acquired Polo in February 2018, it inherited 140,000 support tickets. Now, more than a year later, Circle says it’s all caught up. Polo’s customer support has been “completely transformed” and 95% of inquiries are now handled within 12 hours.

Coinbase

Yet another executive has left Coinbase, president and COO Asiff Hirji. This is the third C-level executive to leave the San Francisco crypto exchange this year.

Recently, Coinbase said it was offering a crypto debit card in the UK—a Visa with a direct link to your Coinbase wallet that lets you spend crypto anywhere Visa is accepted. Financial Time’s Izabella Kaminska thinks that could open a back door for dirty money.

Coinbase plans to add margin trading. Leveraged trading lets you supersize your trading power, because you are borrowing from the exchange, but it also supersizes your risk.

It is easy to understand why Coinbase would want to get a piece of the margin trading business. BitMEX has been reeling in the profits with its bitcoin derivative products. The company’s co-founder is now a billionaire who has so much money, he is giving it away.

Binance is also talking about putting margin trading on the menu.  

Elsewhere in cryptoland 

Kik, the messaging app that raised $100 million selling its kin token in 2017, thinks decades old securities laws need revamping. It wants to create a new Howey test.

The Canadian startup launched DefendCrypto.org, a crowdfunding effort to fight the SEC. It’s contributed $5 million in crypto, including its own kin token, toward the effort.

Ted Livingston, Kik’s CEO says there was no promise kin would go up in value, like a stock. But that is not what at all what he implied during a presale pitch.

Craig Wright, the self-proclaimed inventor of bitcoin, created a hoopla when he filed registrations for the bitcoin code and Satoshi white paper. Disagreements over the significance of the registration have spilled out into his Wikipedia page. Drive-by editors even tried to change Wright’s name to “Craig Steven Fart face.”

Taotao, a new crypto exchange is launching in Japan. It is fully licensed by the Financial Services Agency, the country’s financial watchdog, and it is 40% owned by Yahoo Japan.

As long as the price of bitcoin keeps going up, that is all that matters to bitcoiners. David Gerard delves into the origin of the phrase “Number go up.”

Geoff Goldberg, well-known for his battles against the relentless XRP armies, has been mass reported for calling out the bots that run rampant on twitter. No good deed goes unpunished, apparently. Twitter has effectively silenced him for seven days.

Finally, the Associated Press has a new entry on crypto—sorry, cryptocurrency.

# # #

Related stories:
Social media startup Kik is kicking back—at the SEC
Turns out, you can make money on horse manure, and tethers are worth just that
“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

 

 

“QuadrigaCX traders lost money on Cryptopia on the same day in January”—my first story for Decrypt

Screen Shot 2019-05-28 at 6.56.36 PM.pngI just had my first story published in Decrypt, and you should read it!

Some background — I had been getting a few direct messages from QuadrigaCX traders who also lost money on Cryptopia, the NZ-based altcoin factory that recently went kaput. This led me into researching Cryptopia and learning the two exchanges shared a few commonalities.

Oddly, the death of Quadriga CEO Gerald Cotten was announced on January 14, the exact same day Cryptopia was hacked. This could be a wild coincidence, but still, it’s weird.

Both companies were run by amateurs, both had dollar-pegged tokens—Quadriga used Quad Bucks and Cryptopia came up with the idea for NZDT on a lark—and they both experienced crippling banking issues.

The Canadian Imperial Bank of Canada froze accounts belonging to Quadriga’s third-party payment processor Costodian in January 2018. And ASB Bank closed Cryptopia’s NZDT account just weeks later—another weird coincidence.

More details in the article!

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News: Kraken sets out to raise millions, Circle is cutting staff, Bitfinex scores another tiny victory in court

Crypto exchanges are struggling. Revenue growth is not what it was during the bubble of 2017, and regulators are cracking down. You can’t just list any old coin anymore without considering, “Is the SEC going to deem this a security?” And the cost of hiring lawyers, responding to subpoenas, and staying compliant is cutting into profits. So what are exchanges doing? They are laying off staff and/or trying to raise more money, while they hold out hope for the big institutional money that will come any day now.

Kraken and Bnk to the Future

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Recently, customers of Kraken got an interesting email offering a “rare, but limited opportunity.” Some folks thought the email was spam, but it was real.

Turns out, the San Francisco-based trading platform is partnering with Bnk to the Future as a way to raise funds by selling preferred shares of its stock. You can own a piece of Kraken for as little as $1,000. (In the US, you need to be an accredited investor, though.) 

The exchange hopes to rustle up $15.45 million. (Originally, it wanted to raise $10.2 million, but lifted the goal.) As of this writing, Kraken has raised $6.2 million from 942 investors. The crowdfund runs until June 20.

In December, Kraken tried to raise money at a $4 billion valuation, and it reportedly raised $100 million early this year, which it used to buy Crypto Facilities, a regulated London-based crypto derivatives exchange.  

In 2016, Bitfinex also used Bnk to the Future when it encouraged its customers to exchange their BFX tokens to shares in iFinex, the parent company of Bitfinex and Tether. BFX was the token that Bitfinex gave to its customers in compensation for funds they lost when the exchange was hacked. The exchange sold $57.39 million worth of iFinex shares in this manner, basically converting stolen funds to shares.

Bitfinex customers didn’t have much of an option. BFX tokens were dropping in value, and they wanted to get their money back.

Bitfinex/Tether and the NYAG law suit

Bitfinex joyously declared another small legal victory on May 22, when New York Supreme Court judge Joel M. Cohen granted a motion limiting the scope of the documents Bitfinex and Tether have to hand over to the New York Attorney General’s office.

The day prior, the companies had filed a motion to dismiss the case outright with three new court docs: proposed order to show cause, a memorandum in support of the motion to dismiss, and an affidavit by their general counsel Stuart Hoegner.

Lawyers for the companies argued the Bitfinex platform does not allow New Yorkers to trade (putting it outside of the NYAG’s jurisdiction), the Martin Act doesn’t apply to them (because tether is not a security or commodity, they said), and the document requests were too onerous. The NYAG has seven days to respond, and the judge scheduled a hearing for the motion to dismiss on June 29. 

According to Hoegner’s affidavit, which I read late one evening, you can’t actually redeem tethers 1:1 unless you bought them directly from Tether, which means if you got them on an exchange somewhere, too bad. You won’t be too surprised to learn then, that I can’t find a single person who claims to have either bought or redeemed tethers via Tether Ltd.

The Block got hold of a court transcript from the Bitfinex court hearing on May 16. “Tether actually did invest in instruments beyond cash and cash equivalents, including bitcoin,” a lawyer for Bitfinex told the court.

Wait, what? Bitcoin? Tether invested in bitcoin?

The entire purpose of tether is to be a stable asset that traders can use to escape market volatility. Yet, Tether is taking its reserves—money that it was supposed to keep an eye on, so that tethers always remained fully backed—and investing it in a highly volatile asset. What if bitcoin crashes? What then of the stablecoin? 

We learn something new about Tether everyday, it seems. According to CoinMarketCap, every 24 hours, the entire $3 billion supply of tethers changes hands 7.5 times, but not really, because most of that volume is fake.

The Block analyst Larry Cermak posted a graph of exchanges that trade tether, and some of the ones with the highest volume are obscure platforms nobody has heard of. “If I were to make an educated guess, at any given time, only a maximum of 15% of the total Tether volume is real,” he tweeted. In other words, it is all wash trading, i.e., trading bots simultaneously buying and selling tether to create the appearance of frenetic activity.

As far as I can tell, tether’s actual value is on par with horse manure—giving true meaning to the word “stablecoin”—just not as good for the roses. 

Circle and Poloniex

Circle, the Boston-based company that bought crypto trading platform Poloniex in February 2018, is laying off 30 people—10 percent of its workforce. The company blames the layoffs on an “increasingly restrictive regulatory climate.”

Last week, I mentioned that Poloniex geofenced nine altcoins, meaning people in the US will no longer be able to trade those coins on the exchange after May 29. Circle said  recent guidance from the SEC was a trigger for the move. I took another look and realized that one of the coins was Decred—a fork of bitcoin. Why Decred?

It’s possible the project’s premine and governance structure look a little to shareholdery, and Circle, which is backed by Goldman Sachs, is not in a position to risk listing any coins on Poloniex that might be construed as securities.

QuadrigaCX

I finally got around to writing up QuadrigaCX Trustee’s Preliminary Report. Ernst & Young basically says the money is all gone. Also, it adds that Quadriga’s financial affairs were a complete mess, and they’ll probably never sort everything out properly.

Remember the photo of 1,004 checks sitting on a stovetop? EY finally deposited those into a disbursement account on April 18. What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!

Also interesting, Black Banx (formerly WB21), the third-party payment processor allegedly holding $CA12 million in Quadriga funds is now issuing Visa cards without Visa’s consent. Antony Peyton, the finance journalist who had a thug show up on his doorstep last time he wrote about them, has been researching the company.

Cryptopia

New Zealand crypto exchange Cryptopia went belly up on May 14. Turns out, for the last nine months—since before the January hack that put it out of business—Adam Clark, the exchange’s former founder and programmer, has been building a new crypto exchange. According to his LinkedIn profile, he’s been working on Assetylene since September 2018. So, if you lost your money on Cryptopia, you can try again on Assetylene. I’m sure they’ve got their security issues sorted out by now.

Meanwhile, the funds that were stolen from Cryptopia are on the move. Whale Alert, who has been keeping on eye on the transfers, says funds from Cryptopia recently went to Huobi, where they were likely traded for other coins. Whale Alert also noted 500 ETH going to decentralized exchange EtherDelta.

Elsewhere in cryptoland

Facebook is getting ready to launch its GlobalCoin cryptocurrency payments system in 2020. They probably want to do something like PayPal combined with social media. David Gerard asks: “Why are on earth are they doing this as a cryptocurrency?” As he explains, nothing about putting this on a blockchain makes any sense whatsoever.

Bestmixer.io, one of the largest crypto mixers and tumblers, was shut down by Dutch authorities with the help of Europol and Luxembourg law enforcement. According to Europol’s press release, it was responsible for $200 million in money laundering.

Well, this is a shocker. The SEC has again delayed the VanEck bitcoin ETF proposal. Here is the order. The new deadline for the SEC to make a decision is August 19, and it can delay one more time for a final deadline of October 18, Jake Chervinsky tweeted. It’s been eight years, and the SEC has yet to approve any bitcoin ETFs in the US.  

Bitcoin is set to overtake the existing financial system—or maybe not. In a recent report, the European Central Bank says crypto poses no threat to financial stability in the euro zone. A “very low” number of merchants currently allow buying of goods and services with bitcoin, and there is no “tangible impact on the real economy.”

The IRS is planning to publish new tax guidance for crypto holders and traders. The last time it issued guidance was November 2014, back when it said crypto would be treated as property and you had to report earnings as capital gains.

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News: $250 million longs wiped out by bitcoin whale, Binance reopens withdrawals, Bitfinex set to trade LEO

Screen Shot 2019-05-18 at 5.17.10 PMThe price of bitcoin (BTC) is organically decided by traders—big ones, and only a few of them.

In the morning of May 17, the price of bitcoin did a nosedive, dropping from around $7,726 to $6,777 in about 20 minutes. The plunge was due to the actions of a single large trader (a “whale”) putting up 5,000 BTC (worth about $40 million) on crypto exchange Bitstamp.

The massive liquidation wiped out $250 million worth of long positions on BitMEX, a bitcoin derivatives exchange based in Hong Kong. (The BTC price it used bottomed at $6,469.15.) This, in turn, caused bitcoin’s price to plummet on other exchanges.

It’s hard not to view this as intentional price manipulation. 

BitMEX relies on two exchanges—Bitstamp and Coinbase Pro—equally weighted, for its Bitcoin-US dollar price index. Bitstamp and Coinbase both have low trading volumes, which makes them particularly vulnerable to price manipulations. It is like rolling a bowling ball down an alley and there are only two pins. You just have to aim for one.

Dovey Wan, partner at crypto asset investment fund Primitive Ventures, was the first to spot the dump on Bitstamp. She tweeted“As NO ONE will simply keep 5000 BTC on exchange, this is deliberately planned dump scheme, aka manipulation imo.” 

Despite the hit, the price of bitcoin magically recovered. As of this moment, it is trading at around $7,300. Bitstamp has launched an investigation into the large trade.

Delay, delay, delay

In the wake of such blatant price manipulation, it is tough to imagine that the SEC will ever approve a bitcoin exchange-traded fund (EFT).

On May 14, the US regulator again delayed a decision to approve the Bitwise ETF proposal. The deadline for the SEC’s ruling on the VanEck bitcoin ETF is May 21, but I’m betting that will get pushed out again, too.  

Bitfinex

The New York Supreme Court has ordered Bitfinex to stop accessing Tether’s reserves for 90 days, except for normal business activities. The judge modified the New York Attorney General’s original order to ensure it does not restrict Tether’s “ordinary business activities.” Bitfinex played up the event as a “Victory! Yay, we won!” sort of thing, but the NYAG’s investigation is ongoing, and the companies still have to hand over documents.  

Traders clearly don’t have much confidence in Bitfinex at the moment. Amidst the regulatory drama swirling around Bitfinex and Tether, they are moving a “scary” amount of bitcoin off the exchange. 

Meanwhile, Bitfinex is pinning its hopes on its new LEO token. Paolo Ardoino, the company’s CTO, tweeted that Bitfinex raised $1 billion worth of tethers—not actual dollars, mind you, but tethers—in a private sale of its new token LEO. Bitfinex has yet to disclose who actually bought the tokens, but I’m sure they are totally real people. 

Bitfinex announced that on Monday, May 20, it will begin trading LEO in pairs with BTC, USD, USDT, EOS, and ETH. It will be interesting to see if traders actually buy the token. US citizens are not allowed to trade LEO. 

Binance

After freezing deposits and withdrawals for a week following its hack, Binance opened up withdrawals again on May 15. Traders are now free to move their funds off the exchange. 

Binance is looking to create utility around its BNB token. The exchange burned all of its Ethereum-based BNB tokens and replaced them with BEP2 tokens—the native token of Binance Chain. The cold wallet address is here.

Cryptopia, Poloniex, Coinbase

New Zealand crypto exchange Cryptopia is undergoing a liquidation after it experienced two security breaches in January, where is lost 9.4% of all its assets. Its customers are understandably pissed and outraged.

After the breach, the exchange was closed from January until March 4, when it relaunched in a read-only format. Ten days later, traders woke up to a message on the exchange’s website that read, “Don’t Panic! We are currently in maintenance. Thank you for your patience, and we apologize for the inconvenience.” Cryptopia closed permanently on May 15. Grant Thornton NZ, the company handling the liquidation, expects the process will take months.

In the US, regulatory uncertainty continues to plague exchanges. Boston-based Poloniex, which Circle acquired last year, says it will disable US markets for nine tokens (ARDR, BCN, DCR, GAME, GAS, LSK, NXT, OMNI, and REP). “It is not possible to be certain whether US regulators will consider these assets to be securities,” the exchange says. 

Meanwhile, Coinbase is using the $300 million it raised in October to gobble up other companies. The San Francisco-based exchange is in talks to buy Hong Kong-based Xapo for $50 million. Xapo’s coveted product is a network of underground bitcoin cold storage vaults. The firm is rumored to have $5.5 billion worth of bitcoin tucked away in bunkers across five continents. 

Elsewhere in Cryptoland 

John McAfee has disappeared. “He was last seen leaving a prominent crypto person’s home via boat. He is separated from his wife at the moment. Sources are claiming that he is in federal custody,” says The Block founder Mike Dudas.

McAfee’s twitter account is now being operated by staff, who later denied he was in custody, posting pics of McAfee with his wife in their “new” backyard. 

Decrypt’s Ben Munster wrote a hysterical piece on Dudas, who has a habit of apologizing post tweet. “He tweets like Elmer Fudd shoots his shotgun; from the hip, and nearly always in the foot.” The story describes Dudas as a real person with human foibles.  

Bakkt says it’s moving forward with plans to launch a physically settled bitcoin futures product in July. The company does not have CFTC approval yet—instead, it plans to self-certify, after which time, the CFTC will have 10 days to yea or nay the offering.

Both CME and CBoe self-certified their bitcoin futures products as well. The difference is this: they offer cash equivalents to bitcoin upon a contract’s expiration. Bakkt wants to deliver actual bitcoin, which may give the CFTC pause.

The SEC has fined Alex Tapscott, co-author of the book “Blockchain Revolution,” and his investment firm NextBlock, $25,000 over securities violations. (Here is the order.) And the Ontario Securities Commission fined him $1 million.

In 2017, NextBlock raised $20 million to invest in blockchain and crypto companies. In raising the money, Tapscott falsely touted four blockchain bigwigs as advisors in slide decks. After being called out by then-Forbes writer Laura Shin, the company returned investors’ money. But the damage was done, and the SEC went after them anyway.

Tim Swanson pointed out that the the Stellar network went down for about two hours, and only those who run validator nodes noticed. Apparently, nobody actually cares about or uses the Stellar network.  

According to a report by blockchain analysis startup Chainalysis, 376 Individuals own one third of all ether (ETH). Based on a breakdown of the Ethereum initial coin offering, which I wrote for The Block earlier this year, this comes as no surprise.  

Robert-Jan den Haan, who has been researching Bitfinex and Tether since way back when, did a podcast interview with The Block on “What the heck is happening with Bitfinex.” If you are Bitfinex-obsessed like I am, it is worth listening to.   

Apparently, kicking back at regulators is super costly and something you may want to consider before you launch a token that doesn’t have an actual use case. SEC negotiations have cost Kik $5 million, as the media startup tries to defend its KIN token.

# # #

News: WB21 rebrands, Patryn is without a doubt Dhanani, and Quadriga creditors now have a committee

What do you do when bad press gets you down? Silly rabbit, you change your name. WB21, the firm that has been holding on to several millions of dollars in Quadriga funds is now Black Banx!

According to the firm’s press release (archive): “WB21 decided to rebrand its corporate image using the more expressive name ‘Black Banx’ to better describe the business activities and the companies [sic] rebel approach in the banking industry.”

(WB21 founder Michael Gastauer has since deleted a tweet about the event.)

Screen Shot 2019-04-12 at 8.25.10 PM

Here is the kicker. Black Banx is registered at The South Quay Building, 189 Marsh Wall, London, England—the same address as WB21. However, the address in the press release is 88 Queens Quay West, Toronto, Ontario.

Wait what? Black Banx has an office in Canada?

I looked up the address on Google. This is a humungous office building. It is also home to Royal Bank of Canada, which is, coincidentally, the bank where Quadriga’s court-appointed monitor Ernst & Young (EY) set up accounts to hold money on behalf of Quadriga creditors. Black Banx is likely using a virtual office or a coworking space in the building. If anyone in the area cares to take a look, let me know.

(Read my Quadriga timeline for a complete history of the Canadian crypto exchange.)

WB21 threatened me with legal action after I wrote about them. I responded by publicizing the emails and documents they sent me in a tweet. Bitcoin advocate Andreas Antonopoulos, who has 473,000 Twitter followers, found my tweet and retweeted it.

That led to few crypto news outlets, such as News BTC and CoinGeek, running stories on the incident, with some added dramatic flair. (The CoinGeek headline actually misses the point a bit and says I’m in a “tussle” with QuadrigaCX.)

Interestingly, I found an old story in Bitcoin Magazine from June 2016 when WB21 first started accepting bitcoin deposits—with the help of BitPay to convert bitcoin to fiat. After the news broke, many bitcoin investors saw WB21 as a way to cash out of their bitcoin.

Former WB21 user Adrian Bye told me, “I’m not in the US, and for me, and many others, getting crypto into fiat is quite complicated, so we have to look into alternative solutions.” He sent $40 worth of bitcoin to WB21 to “test out the system” and never saw that money again.

On the topic of “changing your name,” Bloomberg straight out announced that Quadriga cofounder Michael Patryn is convicted felon Omar Dhanani. Bloomberg tracked down official documents showing two name changes. According to the report, “Patryn changed his name from Omar Dhanani to Omar Patryn with the British Columbia government in March 2003. Five years later, he registered a name change to Michael Patryn in the same Canadian province.”

Combine this new information with the 2005 booking photo of Dhanani the Globe and Mail (archive) pulled up recently, and you have a pretty strong case that Patryn is Dhanani—but I’m sure he still denies it.

Quadriga’s creditors now have official representation. Miller Thomson and Cox & Palmer appointed a seven-person steering committee to help them represent the exchange’s 115,000 creditors. One of the members, Eric Bachour, also lost money in Mt. Gox, the Tokyo-based exchange that collapsed in 2014. He is probably suffering from a horrible case of deja vu right now.

Earlier, I wrote on how Quadriga’s representative Stewart McKelvey (aka “Applicants’ Counsel”) withdrew from the CCAA case. The details were murky based on a statement by the firm. New details have emerged in a letter Miller Thomson (aka “Representative Counsel”) sent to Quadriga creditors. From the letter:

“Representative Counsel sent two letters to Applicants’ Counsel expressing discomfort with the conflicts of interest presented by Stewart McKelvey’s representation of both the Applicants and Ms. Robertson. The Monitor expressed similar concerns. We advised Applicants’ Counsel that, in our view, this represented an irreconcilable conflict that needed to be addressed without delay.”

Basically, there was a “concern” of a potential conflict of interest, because Stewart McKelvey represented both Quadriga in its CCAA case and the estate of Jennifer Robertson, the widow of Quadriga’s dead CEO Gerald Cotten. But there was no evidence of a conflict of interest per se. At least that’s how I read it.

Quadriga creditors are waiting patiently for Ernst & Young to file its fourth monitor report. It has been more than three weeks now. The last report was filed on March 1.

Some Quadriga creditors are wondering how to report their crypto gains and losses in  their tax filings without their Quadriga trading histories. Reddit user “Cyphrus21” who claims to be a CPA, suggested they make a best guess and file an amendment later when the information becomes available. (If it ever becomes available.) He/she notes: “Lastly, Quadriga didn’t become insolvent / delisted until 2019, so you cannot declare your loss on that event until when you file your 2019 tax return in 2020!”

Other exchange-related news  

Last year, I wrote an in-depth article on Binance, the crypto exchange based in Malta, for The Block. I still have a hard time keeping up with CZ’s business schemes. (CZ is the CEO of the exchange.) Recently, Binance announced that it is changing the sale format of Binance Launchpad, its token launch platform, from a “first-come-first-served” to a lottery system based on your BNB holdings.

BNB is Binance’s own Ethereum-based ERC20 token. The exchange has been struggling to create an ecosystem around the coin, and this is really grabbing at straws.

ShapeShift is a non-custodial exchange that lets you swap out one coin for other. Founded in 2013, the exchange did not implement KYC identity checks until late 2018. ShapeShift was upset about a September 2018 WSJ report that claimed the exchange was being used to facilitate money laundering. To clean up its image, ShapeShift asked blockchain analytics firm CipherBlade to repeat the investigation.

I took a look at CipherBlade and found some, well, interesting stuff. Here’s my story: “Blockchain analytics firm CipherBlade steps in to launder ShapeShift’s image.” Shortly after my story went live, Ben Munster covered the topic for DeCrypt. A few days later, David Gerard brought even more CipherBlade details to light in his post.

U.S.-based crypto exchanges are handling 29 percent of bitcoin trading—much more than what was previously thought. That is because overseas exchanges have an abundance of fake volume, according to a report by Bitwise Asset Management, a firm working to create a crypto ETF. According to Bloomberg, this makes the US (home of Coinbase and Kraken) the world’s second-largest domicile for crypto exchanges by trading volume after Malta (home of Binance).

Also interesting

R.I.P. Bitmain’s massive IPO. The bitcoin mining giant filed to list its shares in Hong Kong in September. (I wrote about it for Bitcoin Magazine.) But it appears the fall in the price of bitcoin has taken too big of a toll on the company.

Billionaire venture capitalist Tim Draper, who has a history of defending fallen Theranos CEO Elizabeth Holmes, is in the Theranos documentary. He is wearing a screaming purple bitcoin tie.

A failed ICO is trying to flog itself  on eBay.

Fresh out of 12 years in prison, former Enron CEO Jeffrey Skilling is exploring a new energy project that runs on—you guessed it—a blockchain. Bloomberg’s Matt Levine writes this imaginary conversation:

“Skilling: We are building a platform to connect energy investors and projects.

Investor: Wait isn’t that kind of what you built at Enron?

Skilling: Yes, thanks for remembering!

Investor: Except it was a huge fraud and investors lost all their money and you went to prison for it?

Skilling: Yes but that’s why we’ll put this one on the blockchain.

Investor: Ooh, I love blockchains.

Skilling: The power of crypto is that you don’t have to trust me.

Investor: It’s true, that is how crypto works.

Skilling: Sure I went to prison for fraud, but this has the power of immutable code.

Investor: It’s so immutable!

Skilling: Can I have your money now.

Investor: All of it, here it is.”

(Thanks to Cas Piancey, who first noticed that WB21 rebranded.)

If you like my work, please support me on Patreon, so I can keep writing newsletters like this one. You can be a subscriber for as little as a few dollars a month.

‘Platform error’ blamed for BTC being sent to Quadriga’s dead CEO’s cold wallet

Screen Shot 2019-02-21 at 3.02.45 AMThe 104 bitcoin (worth $468,675 CAD) that Canadian crypto exchange QuadrigaCX “inadvertently” sent to its dead CEO’s cold wallets on February 6—a day after the company filed for creditor protection—was due to a “platform setting error.”

That and other news was included in Ernst & Young’s (EY’s) second report, released on February 20. EY is the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA). At least now we know that the bitcoin wasn’t sent by somebody clumsily pushing a wrong button. Still, that single automation wiped out more than half of Quadriga’s hot wallet funds.

The rest of the hot wallet funds, worth $434,068 CAD, are now safe from Quadriga. On February 14, EY transferred the coins into cold wallets that it controls. The funds include 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether. But all of this is a mere drop in the bucket compared to the $250 million CAD owed to Quadriga’s 115,000 creditors—most of which is presumably lost forever.

Also in the report: Recall that Quadriga elected a new board following the death of its CEO Gerald Cotten on December 9. The new directors included Cotten’s widow Jennifer Robertson, her stepfather Thomas Beazley and a man named Jack Martel, who nobody knew too much about. Apparently, Martel stepped down on February 11.

And more money is needed to fund Quadriga’s CCAA process. EY and Quadriga’s law firm Stewart McKelvey have already burned through the nearly $300,000 CAD Robertson put up to initiate the process in January.  

Additional money for the CCAA process—and ultimately for Quadriga’s creditors—will come from Quadriga’s payment processors, once they hand the money over to EY in the form of bank drafts. EY also has to get a bank to agree to accept the bank drafts, which is not an easy thing to do. Most banks want nothing to do with Quadriga’s money. 

Costodian, a company created by payment processor Billerfy specifically to manage Quadriga’s funds, is holding $26 million CAD in bank drafts. After the Canadian Imperial Bank of Commerce froze those funds in January 2018, the Ontario Superior Court of Justice took control of that money, and in December, released the funds back to Costodian in the form of bank drafts issued by the Bank of Montreal (BOM).

According to EY, Costodian has so far handed over four BOM bank drafts totaling $20 million CAD. But it is waiting for a court order before releasing two more bank drafts.

One of those is for roughly $70,000 USD. These are personal funds belonging to Costodian’s principal Jose Reyes. EY has determined that those funds do indeed belong to Reyes, but he still needs to sign the check over to EY for disbursement.

The other BOM bank draft in question is for $5 million CAD. Of that amount, Custodian claims that $61,000 CAD also represent Reyes’ personal funds, and that $778,000 CAD is due to Custodian for unpaid processing fees.

Quadriga creditors don’t agree that Costodian should be paid these fees. To resolve the issue, EY notes that “a separate dispute resolution mechanism will be required during the course of these CCAA proceedings.”

In addition, Stewart McKelvey is holding 1,004 in bulk drafts totaling $6 million. These drafts were issued to 1009926 BC LTD, a payment processor run by a former Quadriga contractor. The problem is 1009926 BC LTD was dissolved in January 2018 for failure to file an annual report, so EY is looking to potentially restore the company.

EY is currently negotiating with the Royal Bank of Canada (RBC), where it hopes to deposit most of these checks. RBC is proceeding with caution, however.

According to EY, “a stranger to the CCAA proceedings, RBC has expressed hesitation to accept and disburse the BMO drafts, bulk drafts and future amounts, without direction and relief from the court.”

A hearing is scheduled for February 22 to give direction to the banks and to the third-party payment processors, so the funds can be freed up.

After that, another hearing to extend the stay of the CCAA proceedings is scheduled for March 5 in Halifax, where angry Quadriga creditors are looking to stage a protestThe protesters are urging the court to discontinue the CCAA proceedings and launch a criminal probe into Quadriga.  

Update (February 21, 12:30 ET): I made some changes to clarify the amount of personal funds that Custodian principal Jose Reyes claims belong to him in two BOM bank drafts.

Two law firms appointed to represent QuadrigaCX creditors

Screen Shot 2019-02-19 at 7.31.36 PMQuadrigaCX creditors now have a legal team to represent them in the crypto exchange’s Companies’ Creditors Arrangement Act (CCAA) proceedings.

Nova Scotia Supreme Court Judge Michael Wood appointed law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors, who are owed a total of $250 million CAD. Most of that money— $180.5 million CAD—is stuck in cold wallets after the company’s CEO died in India. He was the only one who held the keys.  

To offer some background, a CCAA is a federal law in Canada that gives insolvent companies, such as Quadriga, time to restructure themselves and come up with a so-called plan of arrangement. It is not quite like a bankruptcy. A company can still operate and pay its employees during the proceedings.  

When Quadriga was granted creditor protection on February 5, the judge issued a 30-day stay, to keep any lawsuits at bay. The court also appointed Ernst & Young as a monitor to oversee Quadriga’s business and help Quadriga put together its plan of arrangement.

If that plan is accepted by the court and the creditors, Quadriga users will likely be able to recoup some of their losses more expediently. If the plan is rejected, the stay will be lifted, and creditors can forge ahead with their lawsuits.

In the case of Quadriga, because there are so many creditors, the court felt it appropriate to find them legal representation. Three teams of lawyer vied for that position on February 12. Justice Wood reviewed their credentials and made his final decision today.

In his ruling, he explained that he chose Miller Thompson/Cox & Palmer because both firms have extensive insolvency experience. In the coming weeks, Cox and Palmer, which has an office in Halifax, will take the lead on the civil procedure and court appearances, while Miller Thompson, which is headquartered in Toronto, will handle “project management, communication and cryptocurrencies.”  

The judge noted in his ruling that the firms’ proposal was “thought out carefully with a view to minimizing costs.” The team proposed an initial $250,000 cap on fees. They also said that they would communicate with creditors via social media, and that they would advocate for user privacy, something Quadriga users indicated was important to them. 

Appointing a representative counsel and a stakeholder representative committee in complex CCAA proceedings is not unusual, the judge said. Such measures are usually undertaken when the group of stakeholders is large and without representation, many of them would struggle to effectively participate in the CCAA proceedings.

He also agreed with Quadriga’s lawyer Maurice Chiasson and others that assembling a committee of users to represent the broader group of creditors was something that needed to happen quickly.

“The anecdotal evidence at the hearing is that many people are extremely upset, angry and concerned about dishonest and fraudulent activity,” he wrote. “There are reports of death threats being made to people associated with the applicants. All parties agree that this user group needs representation as soon as possible.”

Quadriga’s stay of proceedings expires on March 7. A hearing is planned for March 5 to update the court on what progress Quadriga and its monitor Ernst & Young have made.

Update: According to an email Ernst & Young sent to creditors, Quadriga will, in fact, seek to extend the stay of proceedings. The monitor writes that “the stay of proceedings may be extended for any period that the Court deems appropriate. There is no standard timeframe for the completion of proceedings under the CCAA.”

Ernst & Young is posting updates to the CCAA proceedings on its website.

How the hell did we get here? A timeline of Quadriga events

Screen Shot 2019-02-10 at 4.24.27 PM

QuadrigaCX, the largest cryptocurrency exchange in Canada, has gone belly up, leaving 115,000 of its customers and all of Canada wondering, “What the hell just happened?”

Some $180 million CAD worth of crypto seemingly vanished when Gerald Cotten, the founder of the exchange, died in India at the age of 30, taking with him the keys to the exchange’s offline cold wallets—which, for Quadriga customers, essentially translates into “all of your money is gone.” The exchange’s customers are collectively owed $250 million CAD in both crypto and fiat.

As is often the case, it’s never a matter of what just happened. If you dig deep enough, you’ll find that the funny business—and there was plenty of it—started long ago.

I’ve cobbled together what I could find on Quadriga and assembled it into a timeline. But before we delve into that, let me introduce you to a few more characters.

Jennifer Robertson is Cotten’s widow, a woman he bequeathed all of his worldly belongings to shortly before his death. In addition to becoming the largest shareholder of Quadriga, she now owns a yacht, an airplane and millions of dollars worth of property—assets that hordes of jilted Quadriga customers feel they now have a right to.  

And then there’s Quadriga co-founder Michael Patryn. Some people—actually, a lot of people—believe Patryn is convicted money launderer Omar Dhanani who changed his name to disguise his criminal past after the U.S. deported him to Canada. I am not saying Patryn is Dhanani. I’ll leave you, the reader, to draw your own conclusion. But I’d be remiss not to include Dhanani’s earlier dealings on my timeline.  

Also, a few words on how the exchange handled its banking. Quadriga had no company bank accounts. If you wanted to purchase crypto on the exchange, you would send fiat to one of Quadriga’s third-party payment processors via bank wire, Interac e-transfer or bank draft. Once your fiat was received, Quadriga would credit your account with QuadrigaCX Bucks,, a digital stand-in for real dollars, Canadian or USD.   

According to the exchange’s website:

“All account fundings are considered to be purchases of QuadrigaCX Bucks. These are units that are used for the purposes of purchasing Bitcoin or other cryptocurrencies. QuadrigaCX Bucks are NOT Canadian Dollars. Any notation of $, CAD, or USD refers to an equivalent unit in QuadrigaCX Bucks, which exist for the sole purpose of buying and selling Bitcoin and other cryptocurrencies.

QuadrigaCX is NOT a financial institution, bank, credit union, trust, or deposit business. We DO NOT take Deposits. We exist solely for the purposes of buying and selling cryptocurrencies.”

Billerfy Labs, owned and operated by a man named José Reyes, was one of Quadriga’s payment processors. Under shell company Costodian, Reyes opened several bank accounts at Canadian Imperial Bank of Commerce, or CIBC, one of the top banks in Canada. Quadriga customers would send their money to one of these accounts.  

If you wanted to redeem your Quad Bucks, you would send a request to Quadriga. The exchange would then forward your request to Billerfy, which would aggregate withdrawal requests before moving large sums of money (say, $100,000 CAD) out of Costodian’s accounts at CIBC to an account held by Billerfy at another bank. And from there, Billerfy would wire the funds directly to you.

In a nutshell, that is how Quadriga moved money. It is also how the exchange got itself into a sticky situation during the crypto boom period of 2017-2018. That is when millions of dollars began pouring into Billerfy/Costodian accounts, arousing the suspicion of CIBC. Banks have to comply with strict anti-money-laundering policies. This makes them strongly averse to anything that looks like, well, money laundering.  

And with that, our story actually begins a decade and a half ago.

Timeline

October 26, 2004 — The gig is up for 20-year-old Omar Dhanani. He is one of 28 people arrested in connection with Shadowcrew, an online bazaar for stolen credit and bank card numbers and identity information. These items were bought primarily with E-gold, a digital currency purportedly backed by real gold. Criminals were drawn to E-gold because it allowed them to transfer funds with little more than an email address.  

Working out of his parent’s home in Fountain Valley, Calif., Dhanani was a moderator on the Shadowcrew forums. He also offered Shadowcrew members an electronic money laundering service. Send him a Western Union money order and, for a fee of 10% of a transaction, he would filter your money through E-gold accounts, adding a layer of anonymity to any purchase you planned to make.

On Oct. 4, 2014, going by the pseudonym “Voleur” (French for thief), Dhanani even boasted in a chat room that he moved between $40,000 and $100,000 a week. He was also known to use the pseudonym “Jaeden.”

At the time of Dhanani’s arrest, authorities seized $99,402 in U.S. currency, $1,858.86 in Western Union money orders, and one 2000 Mercedes Benz CLK320. Most of the cash ($94,580) was taken from the home of Alex Palacio, a reviewer on the Shadowcrew site, and later forfeited. But Dhanani will try to get back the car, the money orders and $4,822—a big portion of which was taken from the closet in his father’s bedroom.

October 29, 2004 — After news of the Shadowcrew bust hits the streets, users on ponzi-promotion forum TalkGold begin discussing the possibility that “Patryn,” a prolific poster on the forum, is actually Omar Dhanani. The majority of the high-yield investment programs (aka ponzi schemes) on the forum accepted E-gold.

After the Shadowcrew investigation wrapped up, investigators turned their focus on E-gold. On April 27, 2007, the U.S. Department of Justice charged E-gold’s proprietors with money laundering and illegal money transmitting. That pretty much spelled the end for E-gold. Nevertheless, E-gold paved the way for a number of other digital currencies, including Liberty Reserve, to take its place in underground economies.

May 9, 2005 — The District Court of New Jersey sets conditions for Dhanani’s pretrial release, which includes a bond for $250,000. His parents, Nazmin and Nabatbibi Dhanani, post equity in their home with the clerk of the District Court of Southern District of California.

May 18, 2005 — Dhanani is released from custody and free on bail until sentencing.

June 27, 2005 — In a civil forfeiture case related to the $99,402 in cash taken from Alex Palacio, Omar Dhanani and Nazmin Dhanani, Omar appears to have changed his name to Omar Patryn. (The document reads: “Omar Dhanani aka Omar Patryn.”) The government argues that the money was derived from proceeds of ID and access device fraud as well as money laundering and are therefore subject to forfeiture. The plaintiffs ask the judge to stay the case until Dec. 30, 2005. 

November 18, 2005 — Dhanani pleads guilty to one count of conspiracy to transfer identification documents, related to his Shadowcrew arrest. According to court docs, the event took place from August 2002 to Oct. 26, 2004. (US. DOJ, Indictment, Wired.) Note that Dhanani appears to have not faced charges for operating an E-gold exchanger. 

August 24, 2006 — A New Jersey judge sentences Omar Dhanani to 18 months in federal prison and following that, three years supervised release. He is also ordered to pay a fine of $1,000. The court recommends he participate in the Bureau of Prisons Inmate Financial Responsibility Program. (Judgement.)

May 23, 2007 — Dhanani is released from prison. (While it looks like he was released early, he was likely credited for time served following his arrest in October 2004.)

April 4, 2008 — After the U.S. deports him back to Canada, Dhanani returns to doing what he does best: moving money. He registers Midas Gold Exchange (archive) in Calgary under “Omar Patryn.” Later, a website called Midas Gold Exchange launches at M-Gold.com offering digital currency exchange services.

Midas is a “pre-approved” money exchanger for Liberty Reserve, a Costa Rica-based digital currency service with its own digital currency, LR.

Users could buy LRs for $1 a piece and use them to pay anyone else who had a Liberty Reserve account. Generally speaking, if you wanted to buy LR, you had to go through a middleman, or so-called “exchanger.” M-Gold bought LRs in bulk from Liberty Reserve and sold them in smaller quantities, charging 5% on every transaction. By using exchangers, Liberty Reserve was able to sidestep collecting ID information on its users.

A number of Midas Gold Exchange customers are displeased with Dhanani/Patryn’s level of service. They register their grievances on Complaints.com.

October 22, 2009 — “Michael Patryn” registers MPD Advertising Inc. in Vancouver, B.C. Nazmin Dhanani is listed as an officer of the company. (If you recall, the name Nazmin appeared earlier in this timeline in association with “Omar Patryn.”) MPD dissolves on August 18, 2013. (Companies of Canada.)

Screen Shot 2019-04-08 at 9.55.05 PMMay 20, 2013 — Arthur Budovsky, the main man behind Liberty Reserve, is arrested in Spain and charged with running a $6 billion money-laundering enterprise. Cofounder Vladimir Kats is arrested in Brooklyn, N.Y. Other principals are nabbed in Brooklyn and Costa Rica. Three days later, libertyreserve.com is seized.

Shortly afterward, U.S. authorities seized more than 30 domains registered as Liberty Reserve exchangers in a civil forfeiture case. M-Gold.com is one of them. According to court docs, “the defendant domain names were used to fund Liberty Reserve’s operations; without them, there would not have been money for Liberty Reserve to launder.”

August 21, 2013 — Michael Patryn and Lovie Horner, a woman said to be his partner, register World BJJ Corporation in Vancouver. (Government of Canada.) BJJ stands for Brazilian jiu-jitsu, a form of martial art. Later, she will play a part in Quadriga.

October 31, 2013 — Liberty Reserve co-founder Vladimir Kats pleads guilty to money laundering and operating an unlicensed money transmitter business. (DOJ.) But by now, a new digital currency, Bitcoin, is making headlines. Unlike E-gold and LR, however, Bitcoin is decentralized, making it much harder to shut down. In a 2015 video posted on Youtube, Patryn claims he got involved with Bitcoin in mid-2013.    

November 4, 2013 — QuadrigaCX is incorporated in Vancouver, BC. (The actual operating company is 0984750 BC Ltd.) Patryn is a co-founder along with 25-year-old Gerald Cotten. (Affidavit.) A big hurdle for Canadian bitcoin exchanges is banking. 

As Cotten later explained in a Feb. 10, 2015, interview with Decentral Talk Live, there really was no easy way to buy bitcoin at the time:

“If you recall, back in the summer of 2013, there really weren’t many options here in Canada for people to buy and sell bitcoins…There was one exchange [Cavirtex] that was pretty much leading the pack….and then, other than that, you pretty much had to send a wire over to Japan [a reference to now-defunct bitcoin exchange Mt. Gox], if you wanted to buy Bitcoin…. You couldn’t hook up your bank account anywhere, it was just such a challenge.”

December 23, 2013 — Just before the platform launches, Quadriga registers as a money services business with the Financial Transactions and Reports Analysis Centre of Canada, or Fintrac, the country’s anti-money laundering watchdog. 

According to Bitcoin Magazine, “While it isn’t strictly required by law, such registration is perceived by banks as a sign of legitimacy, and registration has minimized the number of banking issues [Quadriga] has had to face.”

Fintrac doesn’t consider a virtual currency platform a money services business, but that will change on June 1, 2020, when new AML laws take effect.

December 26, 2013 — QuadrigaCX launches in beta with a staff of five. Website architect Alex Hanin continues to oversee the maintenance of the platform via Connect Development Ltd, a business registered in the U.K. (Georgia Straight)

January 30, 2014 — Boasting 1,000 users, QuadrigaCX moves out of beta. In addition to listing bitcoin, the exchange plans to add dogecoin and litecoin in the future. Cotten boasts that one of the main selling points of the exchange is that users can fund their accounts directly with Interact e-Transfers. “It’s the fastest way to get bitcoins in Canada,” he says in an interview with Georgia Straight.

Also on this day, Quadriga launches its first Bitcoin ATM. The Lamassu machine, which sells for $5,000 USD, is installed at Quadriga’s office at 332 Water Street in Vancouver. It’s a one-way ATM, meaning users can buy BTC, but they can’t use it to sell bitcoin. Cotten wants to open Bitcoin ATMs all over Canada and link them directly to the exchange. (Georgia Straight, CoinATMRadar, Youtube.)

“The plan with the ATMs is they’re going to be hooked up to our exchange. So, if someone makes a purchase from our ATM, it makes an equivalent trade on our exchange, which basically refills the ATM instantly. Our plan is to spread our ATMs around Vancouver and not just Vancouver—around the country,” he tells Georgia Straight.

Soon after, Quadriga advertises on its website that it is looking for partners to host Bitcoin ATMs on their premises. (Bitcoin ATMs generally charge high-transaction fees and offer a notoriously easy way for criminals to launder money, especially in Canada, where at this time, no KYC is required for transactions under CA$1,000 per day. Of course, all anyone has to do is go to the same machine multiple times in one day.)

May 14, 2014 — In another banking workaround, Quadriga announces that it will accept gold. Users can deposit or withdraw funds from their Quadriga accounts in gold bullion. Patryn tells Bitcoin Magazine: “As we have a great deal of past experience with gold trading, it was not a particularly large leap to enable XBT/XAU trades on our website.”

(It is unclear what past experience in gold trading Patryn is talking about here, unless he is referring to running E-gold exchangers, such as Midas Gold and the one he operated in 2004, while he was a moderator on Shadowcrew. While it is true, E-gold was purported backed by actual gold, the exchangers were middlemen, who sold E-gold for cash.)

Accepting gold also means that Quadriga now has to actually store the gold. Bitcoin Magazine writes (emphasis mine):

“Anything can be lost or stolen, of course, but QuadrigaCX is big on security. Nobody wants their funds gambled on a fractional reserve system, so all deposits are backed by gold held in their vault, which the directors have years of experience storing and securing. Full details on their storage system are obviously unavailable, but their known security measures are comforting: their office itself lies behind a barred entrance, and neighbors the office of their security company.” 

October 6, 2014 — Whiteside Capital Corporation, a shell company linked to Quadriga, is incorporated in British Columbia. (Affidavit.) The bigger plan taking shape here is that Quadriga wants to go public via a reverse takeover, which is when a smaller private company buys a larger public company. Doing so requires Quadriga to reorganize itself. 

November 12, 2014 — Ancetera Networks LTC., another shell company linked to Quadriga, is incorporated in British Columbia. Since the company’s only purpose is to hold shares, it also has no employees or contractors. (Affidavit.)

January 26, 2015 — Ancetera Networks changes its name to Fintech Solutions. (BC Laws). Lovie Horner is listed as an executive (Bloomberg). Other directors include Anthony Milewski, William Filtness and Natasha Tsai. (Business Wire.)

Fintech Solutions holds 40,748,300 shares. Of these, Cotten holds 16,800,000 shares (41.2%); Lovie Horner owns 4,200,000 shares (10.3%); and Crypto Group, a Hong Kong Company, of which Patryn is the sole director, owns 7,095,000 shares (17.4%). (Affidavit.)

January 31, 2015 — Despite the positive media coverage, Quadriga is struggling to stay afloat. According to a company prospectus, the trading platform pulled in a mere $22,168 CAD in revenue during the quarter ending Jan. 31, 2015. The company’s net loss for the period was almost $90,000 CAD. 

February 2015 — Unable to grow the company organically, Cotten and Patryn push forward with a plan to take Quadriga public. They raise $850,000 CAD in capital from Canadian brokerage houses Haywood Securities, Jordan Capital Markets, PI Financial, and Wolverton Securities.  

February 5, 2015 — According to a listing in S&P Global, Lovie Horner joins Quadriga as VP of business development. She has a background in fashion design.  

February 23, 2015 — Two of Canada’s biggest crypto exchanges shutter, leaving Quadriga the largest crypto exchange in Canada. Vault of Satoshi turned off its lights on Feb. 17, and Cavirtex says it plans to wind down by March 25. (Bitcoin Magazine.

March 3, 2015 – Quadriga officially announces its plans to go public in a reverse takeover of Whiteside Capital, a shell company set up in October.  

In an episode of the #BlockTalk podcast, Patryn explains that a reverse takeover will eliminate the paperwork involved with getting listed the usual way—via an IPO. The exchange is set to trade under “Quadriga Fintech Solutions.” Public trading is expected to commence with the Canadian Securities Exchange by early April.

Quadriga boasts it will undergo a full financial audit by Wolrige Mahon LLP. “We’re excited to be able to provide an unparalleled level of transparency by merging legacy financial audits with innovative blockchain technology,” Cotten tells Bitcoin Magazine.

But after the big announcement, things quickly go downhill. Quadriga burns through all of its investment capital, and Patryn brings a lawsuit against Robert Lawrence, the Vancouver businessman he enlisted to help take the company public.

Globe and Mail, which reviewed the court documents, writes:

“In Mr. Patryn’s telling, Mr. Lawrence failed to perform his duties properly and the company was never able to list. Mr. Lawrence raised a total of $850,000, of which $150,000 came from Mr. Patryn. But by June, 2015, the company had run out of money and lost 45 percent of its market share, according to Mr. Patryn’s statement of claim. Mr. Patryn said much of the money had to be spent correcting the “poor quality” of Mr. Lawrence’s work. Investors pitched in another $600,000, including $200,000 from Mr. Patryn, to keep the company from failing.

By February, 2016, Quadriga gave up on its plans to list and severed its relationship with Mr. Patryn, he said in court documents, owing to his perceived association with Mr. Lawrence. “News of his termination from QCX has materially and negatively affected his ability to secure similar work in the financial technology industry,” Mr. Patryn’s statement of claim read.

In a response, Mr. Lawrence denied the allegations and said Mr. Patryn approached him, not the other way around. Moreover, Quadriga’s failure was its own fault – and Mr. Patryn was the company’s “controlling mind,” he asserted. (Mr. Cotten is scarcely mentioned in the lawsuit.) Mr. Lawrence sought to have it dismissed. No filings have been made in the case since 2016. Mr. Lawrence could not be reached for comment.”

April 14, 2015 — With great enthusiasm, Quadriga renews plans to install Bitcoin ATMs across Canada. A fleet of new SumoPro two-way bitcoin ATMs is on its way from supplier BitXatm. (Two-way means that users can both buy and sell BTC on the machines.) Quadriga says the new units will be delivered in batches of five in several major cities, including Vancouver, Toronto, and Montreal. (BitXatm tweet.)

According to Bitcoin Magazine, the exchange now has more than 40 machines across the country. Journalist Christie Harkin writes: “Like most other independently owned bitcoin ATMs across Canada, these machines will trade on the Quadriga CX platform. These new BitXATM machines also will be modified to allow for direct cash deposits and withdrawals from customers’ Quadriga CX balances.”

(Where did Quadriga put all that cash if it had no banking? Read my update Quadriga, Quadriga, Quadriga, which talks about how some Quadriga customers claim to have been receiving withdrawals in the form of actual boxes of cash delivered to their door.)

September 29, 2015 — According to SEDAR, Quadriga publishes its last “certification of interim filings.” In other words, its last financial audit.    

November 12, 2015 — Quadriga announces the formation of a blockchain R&D lab —Canada’s first. However, like past Quadriga projects, this one is long on hot air and short on follow through. According to the press release, the lab’s first task is to develop a “platform with two core functions: handling the onboarding and client data management for financial crime systems using the Blockchain and facilitating machine to machine (M2M) payments with Internet of Things (IoT) providers for connected cities.” 

February 29, 2016 — At this juncture, Patryn has supposedly left Quadriga. The reason, he tells Globe and Mail, is because he disagreed with Cotten’s decision to call off listing the company. Quadriga makes a passing mention on Reddit that Patryn is gone, but there is no formal announcement. On the heels of Patryn’s departure, Anthony Milewski and Lovie Horner also resign. (Business Wire)

March 8, 2016 — Quadriga is banned from selling securities altogether when the British Columbia Securities Commission issues a cease trade order. Apparently, Quadriga has not submitted a financial audit for the year ended Oct. 31, 2015. A “Management’s Discussion and Analysis” is also missing.

March 18, 2016 — Director William Filtness and chief financial officer Natasha Tsai step down from Quadriga. Cotten is now a one-man band, managing the majority of work from his laptop, wherever he happens to be. The servers are in the cloud on Amazon Web Services. According to court documents filed in January 2019, he also “took sole responsibility” for handling the exchange’s coins.  

November 3, 2016— Quadriga enters into an agreement with Billerfy, a third-party payment processor run by José Reyes. (Interpleader order.)

November 30, 2016 — Quadriga allows its Fintrac registration to expire. 

February 2017 — Cotten registers his new airplane, an upscale Cessna 400. The plane’s market price at the time is about half a million Canadian dollars. Cotten is a pilot, but the airplane ends up sitting on the runway, barely used. While it only costs about $50 a month to tie down a plane at Debert Airport in Nova Scotia, Cotten was always behind on bills. (Globe & Mail.)

April 5, 2017 — Cotten’s partner, Jennifer Kathleen Margaret Griffith changes her last name to Robertson. (Royal Gazette.) According to CBC, she has also used the name Jennifer Forgeron in the past.

June 2, 2017 — Quadriga announces on Reddit (archive) that it has lost some 67,000 ether (ETH) worth about $14.7 million USD due to a software glitch. The ethereum contract is known, confirming the money is actually lost, not stolen. The exchange says:

“While this issue poses a setback to QuadrigaCX, and has unfortunately eaten into our profits substantially, it will have no impact on account funding or withdrawals and will have no impact on the day to day operation of the exchange.”

July 18, 2017 — Despite his company’s recent financial setback, Cotten still manages to register his 51-foot yacht, The Gulliver. It features three cabins, a dining area for six, a dishwasher, a gas stove, a washer and dryer, an en suite bathroom with a standing shower, along with swim platform with teak battens. He bought the boat from Sunnybrook Yachts, after telling the salesperson he wanted something that could take him to the Caribbean without stopping in Canada or the U.S. for gas. (Vanity Fair.) 

Bitcoin is in the midst of its biggest bull run yet. At this point, one bitcoin is worth about $2,500 USD, but by Christmas, it will be eight times that. But already there are signs trouble is brewing.

August 21, 2017 — Quadriga customers begin reporting delays in redeeming their Quad Bucks. In emails with clients, Cotten blames the “Canadian banking cartel” for the wire delays, saying they are out to “stifle bitcoin adoption” in the country. (Globe and Mail.)

September 26, 2017 — On behalf of Billerfy, the payment processor he operates, José Reyes applies to open three commercial banking accounts at the Canadian Imperial Bank of Commerce’s Beaver Creek Branch. (Interpleader order.)

September 27, 2017 — Reyes visits CIBC’s Bayview Village Branch, and opens personal checking, savings and US dollar accounts. (Interpleader order)

November 28, 2017 — CIBC’s anti-money laundering department reviews the Reyes’ account opening documentation at the Beaver Creek Branch. After the bank learns that Billerfy is a money service business, it closes the accounts. (Interpleader order)

November 30, 2017 — Reyes applies to open two small business banking accounts at CIBC’s Bayview Village Branch on behalf of Costodian, a shell company that he has set up. One is an “expense account,” the other is a “transaction account.” Reyes tells the bank that Costodian is “[n]ot related to Billerfy’s CMO business.” (Interpleader order)

December 17, 2017 — After a spectacular run-up, bitcoin reaches an all-time high of nearly $20,000 USD. In the full year 2017, $1.2 billion worth of bitcoin traded on Quadriga. The exchange took a commission on every trade.

December 4, 2017–February 20, 2018 — At the height of the crypto bubble, tens of millions of dollars flood into bank accounts that Reyes opened up at CIBC to collect Quadriga funds. In three months, 388 depositors make 465 deposits to Costodian’s “transaction account” in the total amount of $67 million CAD. (Some of the money is eventually withdrawn, leaving roughly $26 million CAD.)

December 22–28, 2017—Reyes transfers $2.3 million CAD from Costodian’s “transaction account” to his personal checking and savings accounts. He admits to CIBC he did not notify Quadriga prior to transferring the money to his personal accounts. (Interpleader order.)

January 8, 2018 — CIBC is unsure of who the $26 million CAD belongs to, so it freezes two accounts belonging to Costodian and José Reyes. In an interpleader order, the bank asks the court to take possession of the funds and decide who they belong to —QuadrigaCX, Costodian or the depositors. Cotten fights back, claiming CIBC had no right to freeze the funds. Quadriga has already credited depositors with Quad Bucks.   

February 8, 2018 — According to the Globe and Mail, a new company 700964 NB is registered in New Brunswick as “part of a network of entities that helped move millions of dollars around so Quadriga could take deposits and facilitate withdrawals, sometimes in the form of physical bank drafts, for its clients.” Aaron Matthews, Quadriga’s director of operations, and Sarah-Lynn Matthews are listed as owners, but the address on the registration leads to a rickety trailer in a mobile home park.

February 16, 2018 — CIBC is still trying to sort out who the $26 million CAD belongs to. The bank asks Jose Reyes (the person who controls the frozen accounts) if it is okay to speak to someone at Quadriga. Reyes declines because Cotten had indicated that he was not interested in speaking with anyone at CIBC. (Interpleader order.)

March 6, 2018 — Reyes finally gives CIBC the okay to contact Cotten. (Interpleader order)

March 15, 2018 — CIBC dashes off an email to Cotten asking to speak with him briefly by phone. Cotten declines and requests that CIBC only send him questions in writing. (Interpleader order.)

March 21, 2018 — CIBC emails Cotten questions regarding the relationship of Quadriga with Costodian/Billerfy and the depositors, and Quadriga’s entitlement to the disputed funds. Neither Cotten nor anyone else from Quadriga respond. (Interpleader order.)

June 8, 2018 — Cotten and Jennifer Robertson legally marry, according to Globe and Mail, who obtained the marriage certificate. Although, several Reddit posters, who claim they saw Robertson’s Facebook page, insist the couple got married on October 8, 2018.

July 2018 — Meanwhile, Michael Patryn is working on cleaning up his reputation. He hires Reputation.ca to remove negative content about him on Complaints.com, where he is referenced as a money launderer. Patryn later sues Reputation.ca for not moving fast enough, according to the Globe and Mail, who reviewed the court documents.  

November 9, 2018 — The Ontario Superior Court grants CIBC an interpleader order allowing the court to take control of Quadriga/Custodian’s $26 million CAD in funds until the ownership of the funds can be established. (CoinDesk.)

November 27, 2018 — Cotten signs a will, leaving all his belongings to Robertson, including several properties, a 2017 Lexus, an airplane, a 2015 Mini Cooper and a 51-foot Jeanneau sailboat. He goes a step further and details the distribution of his assets should Robertson not survive him, even specifying that $100,000 CAD goes to his dogs.

After some digging, CBC learns that Cotten’s widow has a company called Robertson Nova Property Management. Apparently, she, her husband and her company bought 16 properties between May 2016 and October 2018, worth $7.5 million CAD.

“Little is known about Ms. Robertson, who appears to have used three different surnames since she began buying real estate in Nova Scotia with Mr. Cotten in 2016,” reports Globe and Mail in February 2019.

November 30, 2018Cotten and wife Jennifer Robertson arrive in New Delhi, India. They have come to the country to celebrate their honeymoon and participate in the opening of an Angel House orphanage they sponsored. (Globe and Mail.)

December 3, 2018 — Physical cash pickups up to $2,500 are now available for Quadriga customers. According to the Reddit (archive) announcement: “We have partnered with selected stores to provide local cash pickup — as we have just started exploring this new method, only one store in Montreal, QC has been set up at the moment. We have another store going live next week in Cornwall, ON and hopefully many more.”

December 4, 2018 — Quadriga announces on Reddit (archive) that Ontario Superior Court is releasing the funds that CIBC held “hostage” to Costodian, its payment processor. Quadriga writes: “According to our counsel, the funds should be paid out by the end of this week.” However, new problems ensue when the court issues the funds back to Costodian in the form of bank drafts, which Custodian has trouble finding another bank to accept.

December 8, 2018 — At 5:15 p.m. Cotten and Robertson land in Jaipur, where they plan to spend four nights at the high-end Oberoi Rajvilas for $923 a night. Soon after the couple check-in, Cotten gets a belly ache. At 9:45 p.m., he checks into Fortis Escorts Hospital. He spends the night at the hospital in a private room. (Globe and Mail.)  

December 9, 2018 — Cotten’s condition deteriorates. At 7:26 p.m. he is declared dead due to complications of Crohn’s disease. The cause of death is cardiac arrest. (Globe and Mail.Robertson withholds the news from Quadriga customers for more than a month. Meanwhile, the exchange continues to accept deposits. (Affidavit.)

December 10, 2018 — Dr. Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refuses to embalm Cotten’s body, in part because the body was coming from  Oberio, the hotel where Cotten had been staying, not Fortis, the hospital where he died. Most bodies are brought to her by ambulance, she said. Additionally, she is uncomfortable with the lack of detail and documentation surrounding the death.

Dr. Mehra later tells The Globe: “That guy [a representative from the hotel] told me the body will come from the hotel. I said: ‘Why the hotel? I’m not taking any body from the hotel, it should come from Fortis.”

December 10, 2018 — SMS Medical College issues an embalming certificate for Cotten’s body. Sangita Chauhan, who heads the anatomy department there, does not actually see the body. Instead, a junior staffer handles the processing. The body is picked up by staffers at Cotten’s hotel, Oberoi. (Globe and Mail.)   

December 10, 2018 — Robertson checks out of the Oberoi and heads back to Canada “with the body,” according to the Globe and Mail. She arrives in Halifax the following day. 

December 13, 2018 — Cotten’s death is registered with the Government of Rajasthan Directorate of Economics and Statistics. “The death certificate, obtained by The Globe, lists his “address at time of death” as the Oberoi Rajvilas.” However, a death certificate, later obtained by CoinDesk, lists his “place of death” as Fortis Escorts Hospital. 

December 13, 2018 — The Angel House orphanage that Cotten and Robertson funded opens in Venkatapuram, India. The money the couple donated only paid for materials. The building is still missing several doors, including one to the bathroom. And the man running the orphanage is going into debt. (Globe and Mail.)

December 14, 2018 — A closed-casket funeral service is held for Cotten at J.A. Snow Funeral Home in Halifax Nova Scotia. He is buried that day. (Reddit.)

Meanwhile, by December, withdrawals from Quadriga have all but ground to a halt. Reddit /r/QuadrigaCX has become awash with people complaining they cannot get their money out of the exchange. (David Gerard.)

January 14, 2019 — Quadriga finally announces that its CEO is dead. Cotten’s widow posts an announcement on the Quadriga website explaining that Cotten passed away in India while opening an orphanage. To quell any suspicions that he ran off with everyone’s money, she bestows her husband with a host of virtuous qualities:

“Gerry cared deeply about honesty and transparency—values he lived by in both his professional and personal life. He was hardworking and passionate, with an unwavering commitment to his customers, employees, and family.”

Robertson also recommends that Quadriga’s head of operations, Aaron Matthews, assume the role of interim president and CEO. Matthews later denied he was CEO. (Tweet.)

Meanwhile, Quadriga’s customers are now having trouble getting their crypto out of the exchange. There is no reason for this. Crypto should move directly from the exchange to the customer. This leads to concern that maybe the crypto funds aren’t actually there.

January 22, 2019 — Robertson sends a petition to the Supreme Court of British Columbia requesting a shareholder meeting to appoint new board members to Quadriga Fintech Solutions because effectively, the company has no board. Per the petition, the owners of QFS are Cotten (43%), Lovie Horner (11%), and Mike Patryn (who had purchased most of the rest), with some other minor shareholders.

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January 25, 2019 — Quadriga holds a shareholder meeting. Robertson, her stepfather Thomas Beazley, and a man named Jack Martel are appointed as new directors. They decide to suspend Quadriga’s operations but hold off on sharing this news with Quadriga’s customers. (Affidavit.)

January 26, 2019 — The newly appointed directors instruct that the platform be paused. According to an affidavit Robertson files on Jan. 31, 2019, “The pause will mean that future trades of cryptocurrency will be temporarily suspended, including the settlement of cash or the trading of currency between users.”

January 28, 2019 — The board meeting was on a Friday. All weekend long, anxious Quadriga customers wait to hear some news. On Monday, they awake to find a large notice on the exchange’s website indicating the site is down for maintenance. (CoinDesk)

January 29, 2019 — Cotten’s widow moves to protect her property. According to the Chronicle Herald, at the end of January, “Robertson took her deceased husband’s name from the ownership of the four properties, worth a combined $1.1 million, then took out collateral mortgages on all four in favour of a trust of which she is a trustee, and finally transferred ownership of at least two of those properties to that trust.” The name of the trust is the Seaglass Trust.

January 31, 2019 — Quadriga’s website remains in “maintenance mode” for three long, nail-biting days. Then a new notice appears, basically stating the company is bankrupt. Quadriga’s board members have applied for creditor protection (affidavit) with the Nova Scotia Supreme Court. A preliminary hearing is set for Feb. 5.

Buried in the notice is alarming news. Quadriga is scrambling to locate its cold wallets. Most exchanges typically keep the majority of their crypto in offline wallets for security reasons. The situation is akin to a bank misplacing all of its money.

February 5, 2019 — Represented by Maurice Chaisson, a lawyer with Stewart McKelvey, Quadriga appears in a Nova Scotia court for its creditor protection hearing. The court appoints Ernst & Young as a monitor in charge of tracking down the $250 million CAD collectively owed to Quadriga’s customers. The exchange is also granted a 30-day stay, meaning customers are unable to sue the exchange in that time. (CoinDesk.) Quadriga updates its website with a new announcement (archive.)

February 5, 2019 — With keys to the exchange’s cold wallets gone missing, many are wondering if Cotten staged his death. CoinDesk posts a death certificate with Cotten’s name misspelled as “Cottan.” Apparently, fake death certificates are easy to come by in India.

February 7, 2019 — Fortis Escorts, the hospital in Jaipur, India where Cotten passed, releases a statement confirming his death. Cotten arrived at the hospital in a “critical condition” with “pre-existing Crohn’s disease and was on monoclonal antibody therapy every 8th week.” He was diagnosed with septic shock and other horrible things. (CoinDesk.)

February 8, 2019 CoinDesk reports that crypto funds were moving through the Quadriga platform up to Cotten’s death. In a series of transactions sent from the exchange’s internet-connected hot wallets, more than 9,000 ETH moved from Quadriga to a handful of other exchanges, including Binance, Bitfinex, Kraken and Poloniex. Most of that crypto was transferred the week before Cotten’s death, but there is no telling who initiated the transactions—the exchange, its customers, or both.

February 8, 2019 — The Ontario Securities Commission announces that it will look into Quadriga. (Reuters). The news comes just days after the British Columbia Securities Commission said it had no reach into the exchange. (Reuters.)

February 11, 2019 — Jack Martel resigns from Quadriga’s board of directors, leaving Jennifer Robertson and her stepfather Thomas Beazley as the only two directors.

February 12, 2019 — Things just keep getting worse for Quadriga creditors. In its initial report, the monitor reveals that on Feb. 6—a day after Quadriga was granted creditor protection—the exchange “inadvertently” sent 104 of the bitcoin it was holding in its hot wallets (worth roughly $468,675 CAD) to its dead CEO’s cold wallet.

The hot wallets now contain 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether—worth $434,068 CAD, less than half the value of what they held before.

February 14, 2019 — Nova Scotia Supreme Court Judge Michael Wood appoints law firms Miller Thomson and Cox & Palmer to represent the more than 115,000 Quadriga creditors throughout the CCAA proceedings. Miller Thomson is the lead counsel located in Toronto; Cox & Palmer is the local counsel. The scope of their work is spelled out here.

February 20, 2019 — In its second monitor report, Ernst & Young reveals that the sending of 104 bitcoin to Quadriga’s cold wallets earlier was due to a “platform setting error.” The CCAA process is also running low on funds. EY is in possession of millions of dollars in bank drafts from Quadriga and its payment processors. The problem is getting banks to accept the funds. (Read my story here.)

February 22, 2019 — The court issues a “Banking arrangement order” at the request of Ernst and Young (EY). The order offers limited protection to the Bank of Montreal (BOM) and the Royal Bank of Canada (RBC) for handling bank drafts related to Quadriga and its payment processors. And, with regard to a disputed $5 million CAD bank draft, $60,958.64 of that is to be paid to Costodian principal Jose Reyes, because EY determined that these were his personal funds. And $778,213.94, which Custodian claims it is owed in unpaid transaction fees, will go into trust account pending further order of the court.

February 25, 2019 — Robertson files a second affidavit. In it, she asks for an extension of the stay of proceedings in the CCAA and the appointment of Peter Wedlake, a senior vice president and partner at tax and accounting firm Grant Thornton, to the position of chief restructuring officer for Quadriga. The CRO would fill the director position left vacant by Jack Martel stepping down on February 11. Thornton apparently has cryptocurrency experience and is a “certified bitcoin professional.

February 28, 2019Globe and Mail (archive) tracks down a booking photo of Omar Dhanani and posts it alongside a screengrab of Michael Patryn taken from a Youtube video off the internet. The two faces look strikingly similar.

March 5, 2019 — Justice Michael Wood grants Quadriga a 45-day stay and approves the appointment of a chief restructuring officer. (My coverage here and here.)

March 13, 2019 — The law firm representing Quadriga in the CCAA proceedings tells the court that it is stepping down, effective immediately. Stewart McKelvey had been representing both Quadriga and the estate of Quadriga’s dead CEO, which led to concerns of a potential conflict of interest from the monitor and the representative counsel. Stewart McKelvey will continue to represent Robertson’s estate.

March 19, 2019Bloomberg straight out announces that Michael Patryn is Omar Dhanani. Reporters tracked down the actual documents showing two name changes. “Patryn changed his name from Omar Dhanani to Omar Patryn with the British Columbia government in March 2003. Five years later, he registered a name change to Michael Patryn in the same Canadian province.”

March 19, 2019 — The representative counsel in Quadriga’s CCAA now have a voice to listen to. Miller Thomson and Cox & Palmer appointed a steering committee to help them represent 115,000 of the exchange’s creditors. The members include: Parham Pakjou, David Ballabh, Eric Bachour, Ryan Kneer, Magdalena Gronowska, Eric Stevens and Nicolas Deziel, with Richard Kagerer and Marian Drumea assigned as alternates.

April 2, 2109 — EY releases its fourth monitor report. The monitor proposes that Quadriga shift from its Companies’ Creditor Arrangement Act proceedings into proceedings under the Bankruptcy and Insolvency Act. EY is moving to preserve Robertson’s assets, so that she can’t liquidate or transfer them. And the monitor is also grappling with a host of former Quadriga third-party payment processors.

April 8, 2019 — Quadriga is officially placed into bankruptcy.  The transition means EY will be granted enhanced investigative powers as a trustee.

April 18, 2019 — Justice Wood extends Quadriga’s creditor protection to June 28. On that date, the CCAA proceeding will expire and Quadriga will enter a pure bankruptcy.  

May 10, 2019 — EY publishes its Trustee’s Preliminary Report. The report is dated May 1, but looks to have been published several days later. It reveals what many Quadriga creditors likely already know — effectively saying, “Your money is all gone.” The company has US$21 million in assets but owes creditors US$160 million.

June 19, 2019 — Quadriga’s fifth report of the monitor is published, revealing huge amounts of money left the exchange through a single fake account “Chris Markay.”

August 26, 2019 — In a second report of the trustee filed with the Supreme Court of Nova Scotia, EY notes that there are now four law enforcement agencies and regulators requesting information about Quadriga. It reveals two: the Royal Canadian Mounted Police and the FBI. The identity of the other two remains undisclosed, though Coindesk reports that one may be an Australian investigative agency and a later story in Vanity Fair suggests one is a federal agency in Japan. Separately, EY also recommends moving Quadriga’s ongoing bankruptcy proceedings from Halifax to Toronto to reduce costs.

“As the majority of the professionals are located in Ontario, there would be significant cost savings to transferring the proceedings to Ontario,” the auditor said. “There are very few remaining ties to Nova Scotia at this time.”

September 10, 2019 — A Nova Scotia judge approves the request to move the Quadriga bankruptcy process to Toronto. The court proceedings for the shuttered exchange have been held in Halifax since January 2019, following its founder’s untimely death.

October 7, 2019 — EY files its fourth report of the trustee. Jennifer Robertson agrees to turn over roughly CA$12 million (US$9 million) in assets to EY Canada. In a statement, she said she had “previously thought [the assets] were purchased with Gerry’s legitimately earned profits, salary and dividends.”

Robertson’s, stepfather, Thomas Beazley, will also transfer to EY any assets he bought with money that came from Quadriga, including a 2017 Toyota Tacoma truck.

Meanwhile, Robertson will get to keep her clothing and personal items, her wedding band (worth CA$8,700) and a 2015 Jeep Cherokee. She will also retain about CA$90,000 in cash, a CA$20,000 Registered Retirement Savings Plan and her shares of the company. She will have to vacate her home in Fall River, N.S., by the end of the month.

November 18, 2019 — Einstein, another cryptocurrency exchange in Canada, goes out of business. The news comes out that there’s nothing left at all. The money and cryptos are all gone. The British Columbia Securities Commission had been investigating Einstein since May 2019 — after multiple complaints from customers who couldn’t access their funds, going back to January 2018, David Gerard reports in his blog.

December 13, 2019 — Law firm Miller Thomson sends a letter to the Royal Canadian Mounted Police on behalf of Quadriga creditors requesting the RCMP exhume Cotten’s body and perform a post-mortem autopsy to confirm his “identity and the cause of death.” Of course, they want this done before spring when the warmer weather is sure to cause the body to further decompose.

January 8, 2020 — Argo Partners, a New York City hedge fund that specializes in purchasing bad debt against bankrupt entities, begins reaching out to Quadriga creditors to see who might interested in selling stakes in their remaining funds. An announcement (archive) on the firm’s website says that anyone interested in “receiving a price quote for your claim” should fill out an online form or call the firm directly.

January 22, 2020 — Miller Thomson, the representative counsel for QuadrigaCX creditors, asks creditors for help in identifying any records related to Crypto Capital Corp. In a letter (archive) posted on its website, the law firm said that it had received information that a “Panamanian shadow bank” may have been a payment processor for the exchange in the final quarter of its operation. In other words, Q4 2019.

Crypto Capital at one time listed Quadriga on its website as a client. The exchange’s now-deceased founder also admitted to using the firm in the past. In an email to Bloomberg News on May 17, 2018, Gerald Cotten wrote: “Crypto Capital is one such company that we have/do use. In general it works well, though there are occasionally hiccups.”

I did some additional research and found evidence strongly suggesting that financial documents from Quadriga’s former users do, in fact, link to Crypto Capital.

January 22, 2020 — EY’s 5th trustee report reveals it racked up nearly $500,000 USD in costs responding to law enforcement requests in the second half of 2019.

January 28, 2020 — Miller Thomson is getting fed up with the RCMP’s inaction, so it sends a letter to Bill Blair, Canada’s Minister of Public Safety and Emergency Preparedness, who is the person responsible for the RCMP, asking him to give them an update on whether Cotten’s body will be exhumed by springtime, or not.

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