The bankruptcy trustee for failed Canadian cryptocurrency exchange QuadrigaCX is now free to hand over a trove of documents—including personal information of the exchange’s users—to the Canadian tax authority.
On Tuesday, Judge Glenn Hainey of the Ontario Court of Justice issued an order authorizing EY to comply with the Canada Revenue Agency’s production demand request. Here is the order. And here is Hainey’s handwritten signed endorsement. He apparently heard the motion over teleconference due to the pandemic.
An important aspect of the order is that it also frees Miller Thomson, the law firm representing Quadriga’s creditors, and the Committee for Affected Users, who speak on behalf of all of the creditors, from any liability.
EY will now be handing over 750,000 documents to the CRA. Many of those documents contain personal information on the 115,000 users who were active on the exchange at the time of its collapse in January 2019.
Quadriga’s creditors are not happy about this. Losing control of their personal data is their worst nightmare. But as I spelled in a previous post, the cost for the creditors to fight any of this would have been prohibitive. It also would have further delayed them getting back any of their already dwindling pool of recovered funds.
One of the biggest fears of cryptocurrency traders is losing control of their personal information. And that fear has become a reality for QuadrigaCX former users.
Ernst & Young, the trustee overseeing the bankruptcy case for the failed Canadian crypto exchange, will be turning over all of Quadriga’s user info and data to the country’s tax collector.
In itssixth report of the trustee posted Tuesday, EY said the Canadian Revenue Authority, or CRA, asked it to hand over information about the failed crypto exchange. In response, the accounting firm wants to send over a mountain of data, which has a lot of Quadriga user data mixed in. And it is seeking an order from the court authorizing it to do so. (The exchange estimated it had 115,000 affected users at the time of its collapse in January 2019.*)
We’ve known this was coming. In August 2019, the CRA sent a letter to EY saying it wanted Quadriga’s records from Oct. 1, 2015, to Sept. 30, 2018. The CRA’s request for documents and information is “significant,” the trustee said at the time. (See the third report of the trustee.)
The long list of requests
Following that, on Feb. 26, the CRA sent EY a seven-page production demand letter. The list of requests includes financial records and documents for tax years ended in 2016 to 2018, corporate legal records, and things like the platform’s raw database, files of AWS accounts, wallet addresses, fiat transaction records from payment processors, and so on
As this is coming from the taxman, EY is obligated to comply. But since it doesn’t have most of the info that the CRA is asking for (Quadriga kept no books), it simply plans to forward a copy of the full EDiscovery Database, redacted only for privilege. The database contains 750,000 individual documents.
In a letter, posted on its website Thursday, Miller Thomson, the law firm representing Quadriga’s creditors, said that it would not oppose the move. At this point, it wants to minimize costs and make sure funds get distributed to the exchange’s users as soon as possible.**
The problem for Quadriga’s users though is that a lot of their personal information is mixed in with those documents in the database. What can they do about it? Not a lot.
On Sept. 17, 2019, when EY was granted an order from the Ontario Superior Court of Justice that would make it easier for them to comply with requests for information from law enforcement, regulators and tax authorities, it also got authorization to produce:
“…material, documents or data that contain any personal information including information related to Affective Users notwithstanding any previous orders of the Nova Scotia Court with respect to confidentiality of Affected User information, as defined in the Representative Counsel Appointment Order dated February 28, 2019…” [Link to order added.]
That order allowed EY to heap all of its Quadriga documents into a single giant database called the EDiscovery Database, and share that entire database with authorities every time they put in a request. This was a lot easier than tailoring each response individually. But it came at the price of giving out personal data about the exchange’s users.
According to Miller Thomson, the cost of trying to fight the CRA’s request would be between CA$50,000 and CA$100,000, notwithstanding the cost of EY and its lawyers.
Alternatively, the law firm could redact or pull anything considered private. But that could potentially come at an even bigger cost because it would require manually going through every single document in the massive database. (And as we know, EY has already spent roughly CA$637,000 compiling that database and responding to legal requests in the second half of 2019.)
Still, Quadriga users aren’t happy. Magdalena Gronowska, one member of the official committee that represents Quadriga creditors, wrote in a Twitter thread on Thursday that the CRA’s request is “an unprecedented affront” to individual privacy. She thinks they are just going on a fishing expedition.
After allowing Quadriga to operate for years with no oversight, the CRA has suddenly decided that it wants to audit the exchange. That’s a problem given that Quadriga maintained no traditional books or accounting records since 2016, and it did not file returns. Most years, Gerald Cotten, the exchange’s now-deceased founder, neglected to even file a personal tax return. When he did file, he claimed no income from Quadriga.
I don’t know what the CRA plans to do with all of this information. Are they planning to find out how much Quadriga should have paid them? Most of that money is long gone, thanks to the massive fraud that took place on the exchange after 2016. And if the CRA wants to make sure that Quadriga’s users pay taxes on any money they get back, there are certainly easier ways to get that information.
* An early affidavit estimated that the exchange had 115,000 affected users when it collapsed. But, in its trustee’s preliminary report, published in May 2019, EY said it anticipated receiving omnibus claims from 76,319 affected users.
**Roughly CA$215 million of user funds (crypto and fiat) was on the exchange at the time it shuttered. EY has so far only recovered about CA$45 million—if you count the CA$12 million that should come from selling properties that Cotten and his wife accumulated after 2016. (See my earlier story in Decrypt and the fourth report of the trustee.)
Ernst & Young, the bankruptcy trustee for failed Canadian crypto exchange Quadriga, filed its fifth report of the trustee with the Ontario Superior Court of Justice on Jan. 22.
The purpose of the 79-page document was to submit the accounts of the trustee and its counsel with regard to activities involving various law enforcement officials, regulatory agencies and tax authorities. In its report, EY collectively refers these activities as “law enforcement.”
In August 2019, EY told the court that it was getting overwhelmed with requests for material from law enforcement agencies and regulators. Collecting and producing the information is hard work and lawyers don’t come cheap. A court order on Sept. 17, 2019, solved that, giving EY the green light to continue cooperating with investigators.
EY worked with its general bankruptcy lawyer Stikeman Elliott to facilitate its cooperation with law enforcement. It also brought onboard Toronto law firm Lenczner Slaght Royce Smith Griffin for extra help in producing documents.
The volume of documents was huge, so EY put everything into a central “EDiscovery” database. At present, the database contains about 750,000 individual documents, it said.
The grand total for six months of responding to investigator inquiries came to CAD $637,156 ($484,000 USD). The costs were broken down as follows:
EY’s fees in connection with law enforcement activities for the period June 24, 2019, to Dec. 31, 2019, came to CAD $188,939.
Stikeman Elliott’s fees in connection with law enforcement activities for the period June 16, 2019, to Dec. 31, 2019, came to $133,618.
Lenczner Slaght’s fees in connection with law enforcement activities for the period June 25, 2019, to Dec. 31, 2019, totaled CAD $314,599.
EY said that it made “various efforts” to minimize costs and streamline the accumulation, review, and production of documents. However, it said, given the volume of documents and the time and effort required, the cost was still significant. The rest of the lengthy report spells out how the expenses were accrued.
Ernst & Young released its fifth report of the monitor last night, and it was a doozy. I covered the report for Decrypt. If you have not read my story yet, check it out here.
The monitor’s report is 70 pages long, and I recommend finding a nice comfortable spot and reading all of it. It is page after page, paragraph after paragraph, of “What the hell?”
According to the report, from 2016 onwards, QuadrigaCX went completely off the rails. Gerald Cotten, the exchange’s now deceased CEO, appears to have had no interest in running a legitimate business. He treated customer funds like his own personal bank account—a bit like Bernie Madoff, only a lot more recklessly.
Cotten gambled with his customers’ money, went on lavish vacations, flew on private jets, and bought properties, an airplane, a yacht, whatever toys he wanted. Now most of the funds on the exchange are gone, and EY still has no clue as to where the cash proceeds went. The big question is, did Cotten really act alone?
Quadriga co-founder Michael Patryn is not mentioned in the report. According to what we know, he completely stepped away from the business in early 2016. After that, Cotten allegedly became a recluse and ran the business into the ground single handedly.
EY has also released a three-part (1, 2, 3) sixth monitor’s report detailing the costs of professional services related to Quadriga’s Companies’ Creditor Arrangement Act. Moving forward, EY is now the trustee in Quadriga’s bankruptcy proceedings.
I suspect that the collapse of crypto exchange QuadrigaCX, which was based in Vancouver, also left a bad taste in the city’s mouth.
A source close to the matter told me that Quadriga had between two to four Bitcoin ATMs in its early days, but those were gone by 2017. The exchange was offering cash withdrawals. Where did all that cash come from? It’s own Bitcoin ATMs and later, the company had partnerships with other Bitcoin ATM operators, the source told me.
Recently, I visited a Bitcoin ATM in Los Angeles and spent time chatting with the owner of the machine. He told me that his machine charged a 7% transaction fee for bitcoin purchases—5% if you are selling bitcoin—and they only do ID checks for amounts over $280.
Bitcoin ATMs vary. Some charge up to 19%, and some only let you buy bitcoin and other crypto—no selling.
In other news, I am now the editor of ATM Marketplace and World of Money. I’ll be writing about cryptocurrency, but also covering ATM machines, money and payments in general. As long as I get to read, research and write all day, I’m happy.
Ernst & Young (EY) has issued a Trustee’s Preliminary Report for failed Canadian crypto exchange QuadrigaCX. Essentially, the message to Quadriga’s creditors is: Most of your money is gone, and we’ll probably never find it again.
According to the report—filed on May 1, and published on EY’s website on May 10—Quadriga owes a total of CA$215 million, but it only has about CA$29 million to distribute to its 76,319 affected users. (Earlier court docs estimated 115,000 affected users. Apparently, a more accurate count is now available.)
The lengthy 50-page report mainly rehashes what we already know. But it is worth a read—especially the first 14 pages, the rest is mostly appendixes—if you need a refresher on what has happened so far. I’ll try and summarize the important bits.
Three legal entities
The report addresses assets and debts for three legal entities: 0984750 BC Ltd (operating as QuadrigaCX) and parent companies Quadriga Fintech Solutions and Whiteside Capital Corporation. The breakdown gets a little confusing because some of the numbers overlap, but as of April 12:
0984750 BC Ltd—had CA$28,649,542 and owed CA$215,697,147.
Quadriga Fintech Solutions—had CA$254,180 and owed CA$214,873,113.
Whiteside Capital—had zero assets and owed CA$214,618,937.
Quadriga’s financial affairs are a total mess, and EY will probably never be able to sort everything out. “A complete and fulsome review of Quadriga’s financial affairs will take considerable time and effort to pursue and may not be possible or cost-effective to complete.” It is relying on unaudited information for this report.
Tracking down the funds
To note, Quadriga filed for creditor protection under the Companies’ Creditors Arrangement Act, or CCAA, on February 5. It is currently transitioning into bankruptcy, a process that will be completed by June 28. EY is the court-appointed monitor in Quadriga’s CCAA procedures and the trustee in its bankruptcy procedures.
Costodian: the frozen bank accounts
Most of Quadriga’s cash on hand comes from third-party payment processor Costodian. In January 2018, Costodian’s bankfroze about CA$25.7 million in funds that Costodian was holding on behalf of Quadriga. Costodian later got the money back in the form of bank drafts, which it was unable to deposit because no bank would touch the funds. When Quadriga applied for creditor protection, Costodian signed over the drafts to EY, who worked with the Royal Bank of Canada to accept the drafts. EY put most of that money into a “disbursement account.”
Related to the Costodian bank drafts, there are CA$778,214 in disputed funds. Costodian claims it is entitled to unpaid processing fees. According to EY, “Quadriga takes the position that no additional fees are payable.” EY is working with Costodian’s lawyer to resolve the issue. If the parties can’t reach a compromise, they will return to court.
EY has put CA$720,000 of Quadriga’s money into a reserve account to address any final CCAA obligations. Any funds remaining in this account after the accountants and lawyers get paid will be transferred into Quadriga’s bankruptcy account. EY will include a final accounting of the CCAA’s administration in its final monitor’s report.
Hot wallet funds
Quadriga also held some crypto in its hot wallets. Those funds have been safely moved into offline cold wallet storage under EY’s control. The funds include approximately BTC 61.33, BCH 33.32, BTG 2.66, LTC, 851.73, ETH 960.36. In its report, EY estimates these funds are worth CA$500,000, but crypto prices fluctuate, so they are worth more now, and could be worth less in the future.
On February 6, before EY took control of the funds, Quadriga inadvertently sent 104 BTC from its hot wallets to its cold wallets. Those funds are as good as gone. Nobody can access Quadriga’s cold wallets, because only the company’s CEO Gerald Cotten held the keys, and he is dead.
Bulk bank drafts
Remember the photo of 1,004 checks sitting on a stovetop? Those were known as the “bulk drafts,” worth CA$5,838,125.92. The checks were written out to 1009926 B.C. Ltd., a “third-party” (I say that tongue in cheek) payment processor run by Aaron Vaithilingam, Quadriga’s former office manager. The company had dissolved, so it was impossible to cash the checks. They apparently just sat on a stove.
Here’s an example of Quadriga’s bookkeeping. These are apparently bank drafts. According to Chiasson they are now, “Off the stove.” pic.twitter.com/yvglesMHyM
EY re-instated 1009926 B.C. Ltd., and the checks were signed over and deposited into the disbursement account on April 18. (What a surprise forthis trader to learn the money was freshly sucked out of his bank account two years later!) EY held the money in the disbursement account for 30 days—in the event of any “bank recourse issues”—before sending it to Quadriga’s bankruptcy account.
Payment processors and other crypto exchanges
There is still a chance more Quadriga funds could be recovered. Quadriga money is still being held by several third-party payment processors, mainly BlackBanx (formerly WB21), which is allegedly holding CA$12 million of Quadriga funds. EY says it is continuing to work on the matter, but it doesn’t know how much it can recover.
EY is also investigating other crypto exchanges where Quadriga supposedly stored some of its crypto. The accounting firm notes, “many of the cryptocurrency exchanges have not cooperated with the monitor’s requests to date.” EY is going to keep after them, but says it may need to seek help from law enforcement.
Jennifer Robertson and all her properties
During the course of its investigations, EY learned that “Quadriga funds may have been used to acquire assets outside the corporate entity.” Cotten and his wife (now widow) Jennifer Robertson purchased a number of assets, including an airplane, a yacht and several properties. As a result, EY negotiated a voluntary preservation order on Robertson’s estate. EY says her assets may be worth CA$12 million.
Robertson herself is a secured creditor, after putting up a total of CA$490,000 in pre- and post-CCAA filing advances, according to EY’s report. (The money was needed initially to kick off the CCAA process.) EY anticipates the debt will be challenged. Of course it will!
Fintech and Whiteside
A few months back, EY learned about CA$254,180 that Quadriga had tucked away in a Canadian credit union and totally forgot about—it’s only money, after all. The account, which had been frozen since 2017, was held under Quadriga Fintech Solutions, but the money pertained to Quadriga’s (0984750 BC Ltd.’s) operations.
EY writes, “The estimated net realizable value of the account receivable from the Fintech Account is net of Fintech’s estimated bankruptcy administration costs.” Bankruptcy is apparently an expensive ordeal. As for Whiteside, it had no assets, so CA$25,000 was taken out of Quadriga’s disbursement account to fund its bankruptcy costs.
There are still questions as to what happened to CA$190 million of funds, mostly crypto, that has seemingly vanished from Quadriga. EY says it intends to file an investigative report by the end of June. Hopefully, that report will reveal more clues.
A lot is going on in cryptoland right now—most of it involves investigations, a New York Attorney General (NYAG) lawsuit and missing funds, but I don’t want to sound negative.
The destiny of all crypto exchanges is to be hacked, apparently. Last year, thieves stole $950 million worth of cryptocurrency from exchanges. So, in many ways, it’s not surprising to hear that Binance, the largest crypto exchange by volume, got hacked a second time.
Binance, all funds SAFU
Thieves looted more than 7,000 BTC from Binance in a single transaction. The hackers, however, are not free yet! They still need to move that $41 million worth of BTC into fiat, a feat that typically requires layering funds into smaller and smaller amounts (generally using a script of some sort), moving it through coin mixers, and then funneling it through various exchanges until they can exit into cash.
Thanks to blockchain, we can watch this money laundering happen real time. The first transaction out of Binance consisted of of 44 outputs. The hackers have since consolidated the bitcoin into seven addresses of mostly amounts. Now we wait.
For the first time in history, we can watch money laundering in real time. I can't think of anything more exciting. https://t.co/m9KVdtCO9U
After the hack, Binance suspended all deposits and withdrawals for seven days. Traders on the platform can’t dump their bitcoin—or their tether. If bitcoin were to crash, they would be trapped. Fortunately, bitcoin is not crashing—it’s pumping. As I write, bitcoin is now at $6,800, having shot up $1,000 within a week.
According to one expert, the boost is partially due to “a rare alignment of celestial bodies forged in an ancient supernova”—thus, number go up. Makes total sense to me.
Binance says it has an insurance policy—its SAFU fund—to cover losses on the exchange. Nobody knows for certain what is in that fund, because there has never been an outside audit, but Binance’s CEO CZ says they have enough bitcoin to cover the losses. Phew!
In a recent blog post, CZ also said the exchange is revamping its security measures, including its 2FA, API and withdrawal validation processes. Also, withdrawals and deposits should resume “early next week.”
Bitfinex’s legal woes
If you need to get up to speed with the Bitfinex and Tether saga, I covered the NYAG lawsuit in my previous newsletter. Robert-Jan den Haan also wrote a complete timeline of Bitfinex’s history with its third-party payment processor Crypto Capital.
We have podcasts, too. I discuss the Bitfinex drama with Sasha Hodder on HodlCast, and Robert talks about it with Laura Shin on her Unconfirmed podcast.
In response to the NYAG’s court order, Bitfinex submitted a motion to vacate. The NYAG filed an opposition, and Bitfinex responded. At a hearing on May 6, New York Supreme Court judge Joel M. Cohen called the preliminary injunction “amorphous and endless.” The prelim will stand, but he is giving both parties a week to sort it out.
Bitcoin was selling at a 6% premium on Bitfinex—a sign that traders are willing to pay more to get rid of their tether and get their funds off the exchange. The price of bitcoin on the exchange was so off-kilter that CoinMarketCap, a website that aggregates bitcoin pricing from top exchanges, stopped pulling from Bitfinex.
The Bitfinex premium disappeared when Binance halted withdrawals on its platform, Larry Cermak doubts it has anything to do with Binance though. He thinks it’s because Bitfinex started processing cash withdrawals again.
Twitter user “Bitfinex’ed,” disagrees. When bitcoins and tethers are stuck on Binance, that effectively reduces the supply and makes it that much easier to pump the market, he told me. He think prices will crash when Binance reopens withdrawals.
“I am lion, hear me roar”
Bitfinex has a $851 million shortfall due to issues with Crypto Capital. How is it going to fix that? Here is an idea: Why not just print more money?
The exchange’s latest plan is a token sale, or exchange traded offering (ETO), on its own platform. It will be selling a new token LEO—as in lion.
Earlier this week, iFinex, the parent company of Bitfinex, released a white paper outlining the business proposition behind the token offering. Each LEO is worth 1 USDT, which is worth $1 USD. This is not the first time Bitfinex has issued a new token to pull itself out of a financial mess. (It created a BFX token after it was hacked in 2016.)
Bitfinex shareholder Dong Zhao told CoinDesk that iFinex has received hard and soft commitments of $1 billion for the token sale. Perfect. That should definitely eleviate all of Bitfinex’s money problems.
Ernst & Young, the trustee for failed Canadian crypto exchange QuadrigaCX, released a preliminary report describing the company’s assets and liabilities. In a nut, Quadriga has US$21 million in assets, but owes creditors US$160 million.
Recently, Negocie Coins, a crypto exchange that you probably have never heard of, rose to number three on CoinMarketCap’s top exchange’s list sorted by volume. How is this even possible? Clay Collins, founder of market data company Nomics, made a video, explaining how crypto exchanges use ticker stuffing and volume spamming to game the system.
The FinCEN document has far reaching implications, such as, it appears Lightning Network (LN) operators qualify as money transmitters. Emin Gün Sirer says he is not surprised “given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11.”
To my reading, the document qualifies every LN operator as an MSB. Given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11, this is not surprising, but it's at odds with the community's expectations.
The US banking committee is concerned about Facebook’s attempt at a cryptocurrency—Facebook coin—and how the social media giant is treating people’s’ financial information. It’s published an open letter with questions for Facebook.
Part that stood out most to me? This line: "Last year, Facebook asked U.S. banks to share detailed financial information about consumers."
Redditor u/BioBiro, who needed to acquire bitcoin for a totally legal purchase, complains about the rigamarole he had to go through. Among other things, “Now there’s two pictures of me and my driving license on their server for the rest of time, I guess.”
Consensus, CoinDesk’s big money maker conference, kicks off in New York next week. Last year it had 8,500 attendees, pulling in ~$17 million in ticket sales—and that’s before sponsorships. Arthur Hayes, CEO of bitcoin derivative exchange BitMEX, was one of several who rolled up to New York Hilton Midtown in a lambo.
Previously, I wrote that Quadriga cofounders Michael Patryn and the now-deceased Gerald Cotten worked together for a period at Midas Gold, a digital currency exchanger that ran from 2008 until May 2013, when it was pulled offline. But it appears their connections stretch back even further.
According to data posted by Reddit user QCXINT, the two business partners appear to have been active on TalkGold, a popular forum for pushing high-yield investment programs, aka ponzis, as early as 2003. Likely, that is where they first met. Evidence also suggests the two were active on BlackHatWorld, a site for discussing dubious marketing strategies for websites. Cotten also appears to have been a ponzi operator himself.
This is a long post, so here is a quick summary of what’s ahead:
Cotten likely began promoting ponzis in his teens.
He was posting on TalkGold under the username “Sceptre.”
At the same time, Patryn posted on TalkGold as “Patryn.”
Patryn and Sceptre joined TalkGold in 2003, within months of each other.
Patryn also posted as “Patryn” on MoneyMakerGroup and BlackHatWorld.
Sceptre first appeared on BlackHatWorld in 2012, but then changed his profile name to “Murdoch1337.”
Sceptre posted as “Lucky-Invest” on TalkGold to promote a ponzi.
What is a high-yield investment program?
HYIP is just another way of saying ponzi. These schemes typically promise ridiculously high rates of returns. But behind the scenes, no real investment is taking place. The operator simply uses money coming in from new investors to pay off earlier ones, all the while skimming funds off the top for him/herself. When the supply of new investors runs dry, the scheme collapses. All ponzis collapse at some point.
Ponzis are nothing new. The name stems from Charles Ponzi, an Italian immigrant who defrauded tens of thousands of Bostonians out of $18 million in 1920. Ponzi went to jail, and when he got out, the U.S. promptly deported him back to Italy. New York financier Bernie Madoff ran a $65 billion ponzi, the largest in history. His ponzi fell apart during the financial crisis when too many customers started trying to pull their money out. He was convicted in 2008.
In the early 2000s, the Internet and the advent of early centralized digital currencies, like E-gold and Liberty Reserve, saw a new wave of ponzis. Operators anonymously set up their storefronts online and used e-currencies to obscure the source and flow of funds.
HYIP operators typically rely on social media and referrals to create hype and make their offerings appear legitimate. Despite the red flags, many people still invest in HYIPs, thinking that if they get in early enough, they can make a buck.
An entire subculture has proliferated around HYIPs. There are sites that track and monitor HYIPs, and forums where people go to promote and learn more about HYIPs. There’s even an HYIP subreddit.
When an HYIP scheme collapses, the collapse is generally blamed on a hack, a theft, or a bad investment—some type of external event that is plausibly at arm’s length from the operator. When that happens, the HYIP operator begins issuing “refunds” — in good faith, of course.
Some HYIP operators even go to the effort of setting up long-winded spreadsheets and paying back dribs and drabs over months. Of course, the first people to get paid back are generally insiders or the operators themselves — under different names — who then loudly proclaim what a great guy the operator is, and how decent it is of him/her to spend all their time and effort refunding everyone.
The U.S. Financial Industry Regulatory Authority, the regulatory body charged with governing business between brokers, dealers and the investing public, writes that “virtually every HYIP we have seen bears hallmarks of fraud.”
TalkGold and MoneyMakerGroup
Starting in January 2003, TalkGold and sister site MoneyMakerGroup were two hugely popular Internet forums used to launch and promote HYIPs. The sites were pulled offline on August 21, 2017, a day after the U.S. Department of Justice filed an asset forfeiture complaint against Edward and Brian Krassenstein, the twin brothers that ran the sites. Homeland Security raided the twins’ Florida homes a month later.
“Since at least 2003, Brian and Edward Krassenstein … have owned and operated websites devoted to the promotion of fraudulent HYIPs. In particular, the Krassenstein run sites ‘talkgold.com’ and ‘moneymakergroup.com’ are discussion forums in which HYIP operators advertise and promote their fraud schemes to potential victims.”
“Patryn” on TalkGold
Michael Patryn, formerly Omar Dhanani, was arrested in October 2004 on charges related to his involvement with Shadowcrew, a cybercrime message board. Operating under the pseudonym “Voleur,” French for thief, he offered Shadowcrew members an electronic money laundering service — wire him cash, and he would fund your E-gold account, thereby adding a layer of anonymity to any purchases you planned to make.
After the Shadowcrew bust, TalkGold users began to speculate that “Patryn,” a prolific poster on TalkGold, was Dhanani — and there is good reason to suspect that he was.
“Patryn” joined TalkGold on April 3, 2003. His profile linked directly to VFS Network, a network for several digital currency exchangers, including Midas Gold, HD Money, and Triple Exchange— three that Patryn himself operated. VFS Network was also his business. (VFS stands for Voleur Financial Services.)
If that is not enough evidence, “Patryn” also openly admits on TalkGold that he operates Midas Gold. The business registration for Midas Gold also lists “Omar Patryn” (one of Patryn’s known aliases) as its sole director.
Patryn also appears to have used the profile name “Patryn” on MoneyMakerGroup, with the same link to VFS Network. He joined MoneyMakerGroup on November 27, 2007, six months after he got out of a U.S. federal prison, where he served 18 months related to his earlier Shadowcrew arrest.
Sceptre on TalkGold
Cotten was likely “Sceptre” on TalkGold. Sceptre joined TalkGold on July 4, 2003, three months after Patryn joined. Cotten would have been 15 or 16, at the time.
TalkGold members were able to list “friends” on the site. A May 2013 archivedprofile page for Patryn shows that he had six friends — one of whom is Sceptre. Similarly, a May 2013 archived profile page for Sceptre shows he had one friend — “Patryn.”
The two also interacted. Many of Sceptre’s TalkGold posts appear alongside Patryn’s in the same thread, either promoting or defending VFS Network, Midas Gold, or one of the other exchanges that Patryn operated. (There is also evidence to suggest that Cotten, not Patryn, was the main operator for Midas Gold.)
On December 7, 2009, when a user on TalkGold complains that he is having issues with Midas Gold, Sceptre replies: “I’ve never had any problems with M-Gold. They are usually very efficient.” Patryn follows on the same thread with, “M-Gold does not work during weekends. What is your order reference number? I will have it taken care of ASAP.”
On September 29, 2012, “Patryn” responds to someone complaining about Midas Gold keeping their money. (This was not unusual, by the way. There were many complaints about Midas Gold withholding customer funds. See here, here and here.)
“To the best of my knowledge, both of us have been responding to your emails. You sent me five emails yesterday demanding that I hurry up and resolve this issue. Your issue will be resolved ASAP. Unfortunately, I cannot force the banks to speed up their investigation process.”
In the same thread, Sceptre replies to “Patryn,” almost mocking the customer.
“lol, I’m surprised you’re willing to help him. You offer your dispute resolution for free, and he thanks you by spamming your inbox and complaining that you don’t reply while you’re sleeping.”
In September 2012, a poster asks, “I am looking for a LR Exchanger into HD-Money.” (Basically, the poster wants to convert one digital currency, Liberty Reserve, into another, without having to go through fiat). Sceptre replies, “For this type of trade I would use ecashworldcard.” Patryn follows by posting a link to his HD-Money site, which lists Ecash World Card as an offering.
Cotten and Patryn on BlackHatWorld
BlackHatWorld is a forum where people go to discuss “black hat” marketing tactics. Paid shilling (paying someone to promote your product on social media), negative SEO attacks (improving your SEO ranking by destroying your competitor’s) and gaming a search engine’s algorithm are all topics of discussion on this forum.
These tactics are generally used by Websites that only plan to stick around long enough to make a quick financial gain, which is exactly what HYIPs aim to do.
Someone going by “Patryn” was also active on BlackHatWorld. This person joined on September 6, 2012, and was last active on September 7, 2017. He only posted 9 messages.
Another poster — “Murdoch1337” — in BlackHatWorld, was much more active. He joined on February 12, 2012, and his last activity was January 8, 2017. This person appears to have previously been posting as Sceptre, and we believe this was Cotten.
(QXCINT also tells me that one of Cotten’s email accounts — firstname.lastname@example.org, which was tied to a number of Cotten’s domain registrations — has or had an active account on BlackHatWorld, but the method he used was too technical for me to confirm independently.)
Murdoch1337 appears as the original poster in a thread titled “Sceptre’s Spectacular Content Services!!! – $1.50 per 100 words” — an indication that Sceptre likely switched his profile name to Murdoch1337 sometime after he started the thread. He responds to other posters in the thread as if he is the one offering the content services. “That’s all the review copies for now,” he writes. “For everyone else, feel free to place your orders using the order info in my original post.”
On September 10, 2013, Murdoch1337 posts an ad for a developer to help him with an upcoming cryptocurrency exchange. In the ad, he writes:
“I am looking for a programmer who is familiar with Bitcoin to develop a website that is very similar to Bitstamp…Also, I’m looking to get this project built and online quickly, so if you are able to do it quickly, that is a bonus.”
This ad was posted three months before Quadriga launched in beta. The timing makes sense given that Quadriga was based on WLOX, an open-source exchange solution available on Github, which would have dramatically reduced the time it took to create a functioning crypto exchange. Alex Hanin built the Quadriga platform, though it is not clear if Cotten actually recruited Hanin via this ad on BlackHatWorld.
I’m looking for programmers who are knowledgeable when it comes to Bitcoin and I found you.
I have a number of projects that need work, including a new Bitcoin exchange. Are you able to build sites like this? If so, i’d like to get in touch
S&S Investments and Lucky Invest
One of Sceptre’s HYIPs was S&S Investments, a website that opened for business on January 1, 2004. (“Copyright @2004 Sceptre” is written at the bottom of the page.) He promotes the scheme as a way to double your money.
“You invest a sum of money into the program and within 48 hours (usually within 18) you will receive a return of anything from 103% to 150%, possibly more.”
He is sure to point out that this is “not what is called a ponzi or pyramid scheme.” It offers returns that are far better!
In case the first offer sounded a little too far fetched, he changes the text later to something only slightly more believable. S&S now becomes a “fixed-term investment,” which pays 115% in a week….”you can invest and walk away in profit after just 7 days!”
Of course, S&S ultimately collapses, and discussion around it gets moved to the “Closed / Scammed Programs” section of TalkGold, where Sceptre continues to string along anxious investors, who continue to hold out hope for a “refund.” He writes:
“Refunds WILL take some time. I cannot guarantee that they will all be made quickly. The refund process is likely to spread over a long period of time, but I am willing to do my best to refund everyone to the best of my ability. Please be patient and you will receive a lovely surprise in your e-gold, a refund from S&S Investments,” Sceptre writes.
One TalkGold user reviewed what he considered to be the 12 biggest HYIP “scams” on TalkGold. This is what he wrote about S&S Investments:
“S&S Investments is an interesting program because it was operated by a ‘well known’ person in the HYIP arena. I use the quote marks, because this person was not well known at all, in fact he was very anonymous. No one knew his name, other than his nickname he used to post with, Sceptre. He used anonymous proxies, he was very well hidden. Yet because he had over 1000 posts on TalkGold, he earned a kind of pseudo-trust that people get from being very visible and always online.
Sceptre started off with a small little program that promised to pay back a large amount after a few days. It soon grew to become very, very popular, and it was not long before he upgraded to a fully automated script.
Sceptre wouldn’t tell people how he made the money, he just said that was his little secret. Virtually everyone invested into S&S Investments based on his post count on TalkGold. “He’s made a lot of posts on TalkGold, therefore he must be honest” seemed to be the general opinion of the investors.
S&S Investments went for sometime before cracks started to appear. First the website went offline, then was back again, but withdrawals weren’t being honoured, then the site went offline again. Finally, Sceptre made an announcement that S&S Investments were closed and refunds were to promised.
For a while, refunds did proceed, but then things started to dry up. Since the summer, no more refunds have been processed.
Hey, just because someone has thousands of posts on a forum, doesn’t mean he’s a trustworthy guy. Use your head, look at what the whole program is offering.”
In May 2004, Sceptre appears to switch to another TalkGold profile, “Lucky-Invest,” to promote a Lucky Invest HYIP.
At one point in a thread, he apparently forgets to log out of Lucky-Invest and continues responding as if he were Sceptre, until another poster calls him out:
“You forgot to sign in as ‘sceptre’. ohhhhhhhhhhhhhh . .. looks like Lucky-Invest changed their message!!! . . . too funny!!! . .. did you get caught Sceptre??? hahaha ;)”
“I’m not trying to hide. Lucky Invest, the Newest Investment/Game. My profits go to help pay refunds. THIS IS A GAME, IT WILL NOT HAVE ANY REFUNDS.”
This is a straight out admission that Lucky Invest was not an actual investment. It was a “game,” in other words, a fraud. When you give me your money, it is mine. There are no refunds in this game, just me sharing my profits.
Knowing that Cotten and Patryn did business together on TalkGold does not tell us where the CA$250 million worth of crypto and fiat that was on Quadriga went. (Only a fraction of those funds have been recovered so far.) But it certainly does bring up questions, such as, was Cotten really just a starry-eyed Bitcoin libertarian? Or was he a seasoned con artist, who had no qualms about taking other people’s money?
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At a hearing on April 18, Quadriga’s court-appointed monitor continued its battle with the exchange’s third-party payment processors to get them to hand over transaction records and funds. The court also extended Quadriga’s creditor protection until June 28.
The stay (protecting Quadriga) is in place until June 28. The CCCA proceeding will expire at that point. It won’t be a “restructuring” any more. It’ll be a pure bankruptcy.
Craig Wright, who claims to be Satoshi, is suing people who are accusing him of not being Satoshi. (Wright has yet to prove he actually is.) As mentioned in my last newsletter, it all started when Wright sued twitter user Hodlonaut. Wright has now followed with libel suits against Bitcoin podcast host Peter McCormack, Ethereum co-founder Vitalik Buterin and crypto blog Chepicap. (CoinGeek, a publication financed by Calvin Ayre, Wright’s billionaire backer, has a full story.)
Craig has started filing lawsuit against those falsely denying he is Satoshi….they can all have a day in court to try to prove their fake case but the judge will rule that Craig invented Bitcoin because he did and he can prove it. https://t.co/d2W44mU9Tl
Naturally, the Bitcoin community is up in arms. In response, Binance—an exchange that has been traditionally unselective in the coins it lists—has delisted BSV (stands for Bitcoin Satoshi’s Vision), the coin that resulted from the bitcoin fork spearheaded by Wright and Ayre. The move was followed by several other exchanges delisting BSV, including Kraken, ShapeShift and Bittylicious. Blockchain.info removed support for BSV from its wallet.
Kraken’s BSV delisting was in response to a poll it put up on Twitter. This quote from Kraken founder Jesse Powell is priceless. He says:
“In this case, it is a unique case for us, we haven’t delisted any other coins because the founders, people who are promoting it turned out to be total assholes.”
Angela Walch, a law professor at St. Mary’s University School of Law, compared the #DelistBSV movement to Visa and PayPal not processing Wikileaks transactions and expressed surprise the crypto world was cheering it.
Thanks for all the comments! Yes, I know that exchanges are centralized and I know what people say about BSV.
From the outside, this looks an awful lot like a Visa/Paypal not processing Wikileaks transactions, so it's fascinating to see the crypto world cheering for it.
Crypto exchanges just aren’t pulling in the gazillions they used to. Binance generated about $78 million in profit last quarter, up 66 percent quarter-over-quarter. But that still falls short of full year 2018, when the exchange made $446 million in profits. Coinbase brought in revenue of $520 million in 2018, down 44 percent year-over-year.
2018 has been an absolutely brutal year for Coinbase. In mid-2018, they had projected $1.3 billion of revenue for 2018, which means they generated 60% less than they originally projected. Yikes. IPO prospects looking really bleak now
Hacks, inside jobs and irreversible goof-ups are pushing some crypto exchanges to the brink. Coinnest, once South Korea’s third-largest exchanges, is closing. Users have until April 30 to get their funds off the exchange. Coinnest lost $5.3 million in a botched airdrop in January, though it blames its closure on low trading volume.
Elsewhere, on April 10, Bittrex’s application for a BitLicense (required to do business in New York State) was rejected—in part, because Bittrex customers were using fake names, like “Give me my money,” “Elvis Presley” and “Donald Duck” to trade.
Bittrex says the NY Department of Financial Services (DFS) “sent four people who didn’t know anything about blockchain.” DFS responded again, saying the exchange “continues to misstate the facts” and “presents a misleading picture about the denial.”
if only they'd sent people who understood so much about Blockchain that they knew that "Donald Duck", "Elvis Presley" and "Give Me My Money" were legitimate customers
Binance is about to begin the process of moving its BNB (currently an ERC20 token) off the Ethereum network and onto Binance Chain, its custom blockchain. Interestingly, The Block’s Larry Cermak notes that Binance has quietly changed its white paper to remove a clause about the exchange using 20 percent of its profits to buy back BNB.
Arwen, a self-custody solution that uses on-blockchain escrows and off-blockchain atomic swaps to allow traders to maintain control of their keys while they trade, launched on Singapore’s KuCoin earlier this week. KuCoin raised $20 million in VC funding last year, and it is the first exchange to partner with Arwen, created by a company of the same name based in Boston.
Finally, Intercontinental Exchange (ICE), the owner of the New York Stock Exchange, is reportedly eyeing a New York license for its crypto exchange Bakkt. The launch date for Bakkt has been delayed for months due to skepticism from the CFTC. The regulator appears most concerned over how tokens will be stored.
POSConnect, a third-party payment processor holding funds on behalf of failed Vancouver-based crypto exchange QuadrigaCX, has come up with more excuses to delay handing over the money.
Today, at a short and mostly procedural hearing held at the Supreme Court of Nova Scotia, the main topics were extending Quadriga’s creditor protection and dealing with lingering issues related to Quadriga’s third-party payment processors, mainly POSConnect.
Justice Michael Wood agreed to extend the stay until June 28, unless Quadriga’s Companies’ Creditors Arrangement Act (CCAA) proceedings are terminated before then. Quadriga officially entered into a bankruptcy earlier this month.
The stay (protecting Quadriga) is in place until June 28. The CCCA proceeding will expire at that point. It won’t be a “restructuring” any more. It’ll be a pure bankruptcy.
The rest of the 30-minute proceeding was mostly taken up by a back-and-forth between POSConnect’s lawyer and Elizabeth Pillon, a lawyer for Ernst & Young, the court-appointed monitor in Quadriga’s CCAA procedures.
At issue, POSConnect is sitting on CA$281,000 of Quadriga funds. EY wants the payment processor to deliver CA$278,000 right away. The plan is to leave CA$3,000 to cover rolling monthly fees associated with keeping the account open.
POSConnect recently granted George Kinsman, EY’s senior vice president, online access to Quadriga’s documents and transaction data on the platform, and EY would rather pay POSConnect CA$500 a month than risk the firm cutting off all online access.
Pillon said more than 500,000 transactions worth CA$400 million in Quadriga funds were funneled through POSConnect—and sorting all that out is going to take time.
Meanwhile, POSConnect is reluctant to hand over any funds at all. The firm argues that it is due CA$22,000 in legal fees—an amount the POSConnect lawyer called “insignificant” compared to the hundreds of thousands of dollars spent so far in efforts to put Quadriga’s financial affairs in order.
EY is running short on patience. “POSConnect has thrown out more hurdles in respect to their obligation to delivers statements and property than any other third-party payment processor,” Pillon told the judge.
As she explained, EY has been reaching out to POSConnect since February 6 to find a means to get information and funds. Yet it wasn’t until late yesterday that POSConnect put forward $22,000 for legal fees and an administrative cost of $350 an hour to provide reporting—without providing any accounting to support those fees.
Justice Wood said he did not have enough information before him to determine what reasonable legal fees would be for POSConnect. POSConnect will be added to an existing order for other third-party processors, which will require another hearing anyway.
Wood expressed regret that he would no longer be overseeing the Quadriga proceedings. He has been promoted to chief justice of the Appeal Court of Nova Scotia.
Spring is in the air! What are your summer plans? If you are considering buying a boat—or maybe even an “almost new” 51-foot Jeanneau with “very, very few hours” for half a million USD—now would be the time!
The yacht belonged to Quadriga’s now-deceased CEO Gerald Cotten. Here is a video of him putting Canada’s plastic money into a microwave. Here he is tossing Winnie the Pooh into a bonfire. And this is him playing with Pokémon cards.
The latest on QuadrigaCX
I wrote about how Michael Patryn and Cotten appear to have been working together at Midas Gold, a Liberty Reserve exchanger, prior to founding Quadriga. David Z. Morris at Breakermag covered the topic as well. (He credited me, so I’m real pleased about that.)
At a court hearing on April 8, Quadriga was given the go-ahead to shift into bankruptcy. The move will save costs and give Ernst & Young (EY) more power as a trustee.
“The trustee can also sell QuadrigaCX’s assets and start lawsuits to recover property or damages,” Evan Thomas of Osler, Hoskin & Harcourt told Bitcoin Magazine. “The trustee will collect whatever it can recover for eventual distribution to creditors.”
An “Asset Preservation Order” for Jennifer Robertson, Cotten’s widow, was filed on April 11. Law firm Stewart McKelvey is setting up three separate trusts to “collect and preserve” any surplus funds from estate assets, personal assets and corporate assets. Depreciable assets, such as Cotten’s yacht, will be sold.
Per the order, Robertson will continue to receive her drawings from her business Robertson Nova Property Management “in accordance with current levels, for the purposes of satisfying ordinary living expenses.” She will also have access to cash from the “personal assets” account to maintain her properties and to cover legal expenses.
Robertson has 10 days from the court order to provide EY with a list of all her assets—including cash on hand.
A cap on pay for Miller Thomson LLP and Cox & Palmer has been raised from CA$250,000 to CA$400,000. The team will continue to represent Quadriga’s creditors in the bankruptcy.
Quadriga’s third-party payment processors now have 10 business days (as opposed to five previously) from when they receive this court order to deliver the following to EY:
Alto Bureau de Change—assets and property.
1009926 BC—all records and transaction-related information.
POSConnect—access to Quadriga’s online account to George Kinsman, who is a partner at EY.
WB21 (now Black Banx)—all records and account statements related to its Quadriga dealings.
The next hearing to discuss issues remaining from the Companies’ Creditor Arrangement Act, including those tied to third-party payments processors, is scheduled for April 18.
Other crypto exchanges
Popular US-based crypto exchange Coinbase suspended trading of BTC-USD pairs for two hours on April 11 due to a “technical issue” with its order book. BTC-USD is a critical trading pair due to its volume and its impact on bitcoin price measures.
It appears that somebody dumped a load of BTC into the exchange’s buy orders causing liquidity to dry up. Coinbase doesn’t want that to happen, so likely that is why it wiped the books, cancelling any outstanding buy or sell orders.
The books are wiped. You can also pump up the price by $900 with just… 70 Bitcoins.
The entire liquidity of Coinbase basically completely vanished. That's why they froze trading. Incredible. pic.twitter.com/AxsrhxhtzB
Coinbase Pro, Coinbase’s professional exchange, is continuing to expand its altcoin reach. The exchange is listing three more altcoins: EOS (EOS), Augur (REP), and Maker (MKR). Coinbase first committed to listing MKR in December, but according to The Block’s Larry Cermak, due to low volume, Coinbase decided to hold off listingMKR.
Crypto credit cards are back in vogue. Coinbase has launched a Visa debit card. The “Coinbase Card” will allow customers in the U.K. and EU to spend their crypto “as effortlessly as the money in their bank.” The exchange says it will “instantly” convert crypto to fiat when customers complete a transaction using the debit card. PaySafe, a U.K. payment processor, is the issuer of the card. In the past, these crypto Visa cards have been known to suddenly lose access to the Visa network, so fingers crossed.
Another executive is leaving Coinbase. The firm’s institutional head Dan Romero has announced he is leaving after five years. This is the third executive to depart Coinbase in six months. Director of institutional sales Christine Sandler left last month, and ex-vice president and general manager Adam White quit in October.
Switzerland-based crypto exchange Bitfinex has lifted its $10,000 minimum equity requirement to start trading. This will undoubtedly bring more cash into the exchange. “We simply could not ignore the increasing level of requests for access to trade on Bitfinex from a wider cohort than our traditional customer base,” CEO Jean-Louis van der Velde said in a blog post (archive).
Meanwhile, Bitfinex customers are complaining (here and here) that they are unable to get cash out of the exchange. Nowsome are saying they are having trouble getting their crypto out of Bitfinex as well.
Reddit user “dovawiin” says, “Ive been trying repeated attempts for 2 weeks to withdraw funs and it always says processing. Ive submitted multiple tickets with delayed answers. Ive cancelled and attempted again a few time after waiting 48Hours with no results. Im currently trying again and nothing for over 24 hrs. This is ridiculous.”
Bitfinex also enabled margin trading on Tether. Margin pairs include BTC/USDT and ETH/USDT. Tether has already admitted to operating a fractional reserve, so this is basically adding more leverage to what’s already been leveraged. I’m sure it’s fine though—nothing to worry about here.
Johnathan Silverman, a former employee of Kraken, is suing the crypto platform for allegedly failing to pay him for work he did. Kraken says it got out of New York in 2015. Silverman says the exchange still maintained an over-the-counter trading desk in the state, which requires licensing for crypto businesses. Kraken told Bloomberg, Silverman “is both lying and in breach of his confidentiality agreement.”
Finally, Malta-based Binance, one of the largest crypto exchanges by volume, is partnering with blockchain analytics firm CipherTrace to boost its AML procedures.
That's why Binance flees from every single jurisdiction, because they want to comply.
All hell broke lose on Twitter Friday when news got out that Craig Wright is making legal threats against Twitter user “Hodlonaut,” who has been publicly calling Wright a “fraudster” and a “fake Satoshi.” Wright has never been able to prove that he is Satoshi.
In a letter shared with Bitcoin Magazine, SCA ONTIER LLP, writing on behalf of Wright, demands that Hodlonaut retract his statements and apologize, or else Wright will sue him for libel. The letter even includes this bizarre prescribed apology:
“I was wrong to allege Craig Wright fraudulently claimed to be Satoshi. I accept he is Satoshi. I am sorry Dr. Wright. I will not repeat this libel.”
Hodlonaut deleted his Twitter account upon receiving the news. And the crypto community formed a giant backlash against Wright. Preston Byrne is assisting Hodlonaut pro-bono, Peter McCormack is selling T-shirts that say, “Craig Wright is a Fraud,” and Changpeng Zhao, the CEO of crypto exchange Binance threatened to delist Bitcoin SV—the token spearheaded by Wright and billionaire backer Calvin Ayre.
Ayre is also demanding apologies related to some photos of him circulating on Twitter with extremely young-looking women. Coin Rivet writes, “We have agreed to pay Mr Ayre substantial damages for libel. We have also agreed to join in a statement to the English High Court in settlement of Mr Ayre’s complaint.”
China’s National Development and Reform Commission (NDRC) released guidancethat includes shutting down Bitcoin mining. “The risk to Bitcoin in the longer term is other governments taking their cue from China—and taking proof of work more seriously as a problem that needs to be dealt with,” writes David Gerard.
Another Bitcoin mining company has gone belly up. Bcause llc filed for Chapter 11 in Illinois. (Steven Palley uploaded the docs on Scribd.) The company is based in Chicago, but its mining rigs are in Virginia Beach. In January 2018, Virginia Beach Development Authority gave the firm a $500,000 grant to build the $65 million facility. Bcause promised to create 100 full-time jobs, with average salaries of $60,000 a year.
But by January, the price of Bitcoin was already on its way down—so much for all those jobs. At least the neighbors won’t have to suffer the noise anymore.
Last summer, Virginia Beach resident Tommy Byrns, told Wavy News:
“The issue is the noise, the relentless noise … it’s kind of created an atmosphere where we can’t talk to each other in the backyard. You have to go in the house to talk … this was pushed through without any warning into anybody … and now look what we have.”
Crypto, the movie, is out. Gerard wrote a full review for DeCrypt on his new battery-powered AlphaSmart Neo 2 keyboard—a 1990s flashback that keeps him from shit posting on Twitter. The film was mediocre—but it stars KURT RUSSELL.
The now-defunct Canadian crypto exchange QuadrigaCX was founded in November 2013. Where did its co-founders Michael Patryn and the now-deceased Gerald Cotten first meet? Did they exchange pleasantries in the Toronto Bitcoin community earlier that year? Did they meet online in some bitcoin chat forum? Or did they have other prior business dealings stretching even further back?
New evidence uncovered by Reddit user “QCXINT” (he’ll be posting more on Reddit soon) suggests that Cotten appears to have been involved with Patryn at Midas Gold, a Liberty Reserve exchanger, set up by Patryn in 2008.
Patryn and Midas Gold
Patryn was formerly Omar Dhanani, a convicted felon who wasarrested in connection with online identity theft ring Shadowcrew.com in October 2004. He was 20 at the time. Working out of his home in Southern California, he was a moderator on the forum. He also offered forum 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. E-gold was an early centralized digital currency. Dhanani served 18 months in a US prison and was released in 2007.
After the US deported him back to Canada, Patryn picked up where he left off. In April 2008, he founded Midas Gold Exchange. He was listed as the company’s sole director under “Omar Patryn,” with a company address in Calgary—though he was living in Montreal at the time. A few months earlier, the digital currency exchange service launched on M-Gold.com. (Here is an archive of the site taken in its early days, and here is an archive showing an updated design taken just before things took a dive).
In January 5, 2008, the earliest entry on the website reads:
“We have finally launched this website, and are requesting that clients place all future orders through the Contact Us page. We have, of course, been in business since 2005 and hope to continue providing you with the same great service throughout the new year. Thank you once again for your business, and have a happy New Year!”
There are no names of actual people anywhere on the site. But an October 17, 2009 entry gives the impression that a whirl of activity is going on behind the scenes.
“We apologize for the delays experienced for many clients during the course of this week. We are currently undergoing a massive corporate restructuring. During this time, some exchange directions are temporarily disabled. All pending orders should be processed within one business day.”
Digital currencies listed on the site included E-Gold, HD-Money, WebMoney, WMZ E-Currency and AlterGold E-Currency. Midas Gold had even started accepting bitcoin inJune 2011, but Liberty Reserve was by far its main money maker.
How Liberty Reserve worked
A Costa Rica-based centralized digital currency service, Liberty Reserve was like PayPal for criminals. You could use it to anonymously transfer the system’s digital currency LR, worth $1 apiece,* to anyone who had an account on the system. The system served millions of users around the world before May 2013, when it was shut down by the U.S. government.
(*All dollars listed in this article are USD)
To set up an account on libertyreserve.com, all you needed was a valid email address. You could make up whatever fake name you wanted, because the site had virtually no KYC/AML to validate identities. You could, literally, use it to send huge amounts of money around the world without anyone batting an eyebrow.
There was one caveat. You could not fund your Liberty Reserve account directly. If you wanted to buy LR, you had to go through a third-party exchanger, such as M-Gold. Conversely, if you wanted to redeem your LR for cash, you also had to go through an exchanger.
LR exchangers would buy LRs in bulk and sell them in smaller quantities, typically charging a 5% transaction fee. This setup allowed Liberty Reserve to avoid collecting banking information on its users, which could leave a financial trail—exactly what criminals want to avoid when choosing a digital currency.
Liberty Reserve went into operation in 2005. Eight years later, the system had more than 5.5 million users worldwide and processed a combined value of more than $8 billion. Most of that volume came from the U.S.
During 2009 to 2013, Liberty Reserve was in full swing. These were the sunshine days of criminal activity. A huge number of transactions were related to high-yield investment programs (HYIPs)—better known as ponzis schemes—credit card trafficking, stolen ID information and computer hacking.
A data dump—in one of the court exhibits (see attachment #180 for GX 1305) related to the takedown of Liberty Reserve—shows that Midas Gold ranked 342 of the top 500 Liberty Reserve accounts in volume.
The name on the Midas Gold account is Omar Patryn, but the email address linked to it is email@example.com. What does that mean? It means whoever owned that email had the authority to operate the Midas Gold account for Liberty Reserve. They could reset the password, enable or disable 2FA, and authorize transactions.
The data indicates Midas Gold bought up more than $5 million worth of LR. At 5 percent of a transaction, that equates to profits of around $250,000—not a lot, but decent wages.
The email suggests that Cotten and Patryn may have worked at M-Gold.com together—though its not clear if Cotten was involved from the beginning or joined later. If anything, this could even suggest that Cotten had more control over Midas then Patryn.
Pause for a moment — if you were going to be involved in a dodgy business, why would you use an email address that directly pointed to you? I know I wouldn’t. If you are still wondering, “Was that really Cotten’s email?” The answer is, “Quite possibly—yes.”
We think this is his email because the person appears to have used that same email address for several domain registrations, including,cloakedninja.com, where you could buy proxy sites to hide your IP address, andcelebritydaily.net, an entertainment news blog. A historical WHOIS data snapshot of these site reveals they both have a registration address of 346-1881 Steeles Ave W Toronto. Quadriga Fintech Solutions, the owner and operator of QuadrigaCX, is linked to the same address.
Patryn’s Liberty Reserve account
In addition to the Midas Gold account, Patryn had his own account on Liberty Reserve, but his account had no associated website. He appears to have had at least three other exchangers at the time—HD Money (archive) and E-cash World and Triple Exchange (archive). It’s possible he was selling LR through those sites as well as Midas Gold, and was just using the one account. Or Cotten could have operated Midas alone, while Patryn handled the other businesses.
Approximately $18.4 million worth of LR went through Patryn’s Liberty Reserve account. Of Liberty Reserve’s 500 largest accounts by volume, his ranked 88. If he took a 5 percent cut of every transaction, he would have amassed a healthy $920,000.
A passage from the court documents explains:
“Data obtained from Liberty Reserve’s servers reflects the extensive use of the company’s payment system by criminal websites. The Government analyzed the top 500 accounts by transaction volume, i.e. funds sent and received, to attempt to determine the type of activity associated with each account. The total transaction volume for these accounts is approximately $7.26 billion, or approximately 43% of the total volume of transactions on Liberty Reserve’s entire system.”
Also according to the analysis, of the top roughly 500 accounts, 44 percent were associated with exchangers, 18 percent could not be categorized, and the remaining 38 percent were categorized as follows:
“157 of the accounts, accounting for approximately $2.6 billion in transactions, were associated with some form of purported ‘investment’ opportunity. The vast majority of these accounts were linked to websites that, on their face, were clearly ponzi schemes, i.e., HYIPs. Others, at best, were associated with unregulated ‘forex’ (foreign currency trading) websites—which are likewise known to be prominent sources of fraud.”
Good things never seem to last, and in May 20, 2013, Liberty Reserve founder Arthur Budovsky was arrested in Spain for running a massive money laundering enterprise. Days later, the domain libertyreserve.com was seized.
Shortly afterward, US authorities seized more than 30 domains registered as Liberty Reserve exchangers in a civil forfeiture case, including M-Gold.com. 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.”
Following the shut down of Liberty Reserve, users were told to contact the court to recoup their lost funds—on the basis they were conducting legit business. According to court docs filed in April 2016: “Notwithstanding that Liberty Reserve had more than 5 million registered user accounts, only approximately 50 individuals have contacted the Southern District Court of New York since May 2013.” Most appeared to be victims of HYIPs and other scams. And only one Liberty Reserve exchanger contacted the court about a potential claim—and that claim was not pursued.
A few months after M-Gold.com was seized, QuadrigaCX launched in beta. The rest is history—or history in the making—depending how you look at it.
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Now onto the news, starting with Quadriga, the defunct Canadian crypto exchange that I won’t shut up about. (Read my timeline to get up to speed.)
Ernst & Young (EY), the court-appointed monitor charged with tracking down Quadriga’s lost funds, released its fourth monitor report, which reveals more money going out then coming in. The closing cash balance for March was CA$23,268,411. Incoming cash for the month was CA$4,232, and total disbursements was CA$1,463,860—most of which was paid to professionals. A full half of that (CA$721,579) went to EY and its legal team.
EY is trying to chase down money held by Quadriga’s payment processors. It has drafted a “Third Party Payment Processor Order” for the court to approve on Monday. If that goes through as is, several payment processors, including WB21, will have five business days to handover funds and/or Quadriga documents and transaction data. If they don’t comply, they will be in contempt of court. A shift from CCAA to bankruptcy proceedings will also give EY more power to go after funds as a trustee.
Christine Duhaime, a financial crimes lawyer who worked for Quadriga for six months in 2015 to early 2016, wrote “From Law to Lawlessness: Bits of the Untold QuadrigaCX” for CoinDesk, where she talks about how Quadriga went off the rails following its failed efforts to become a public company.
In the article, Duhaime—who in February called for a government bailout of Quadriga’s creditors (archive)—openly admits to having lost CA$100,000 in funds on the exchange. She claims her involvement with the exchange stopped in early 2016. “I’m glad we were let go by QuadrigaCX for being one of the ‘law and order’ folks,” she said.
Preston Byrne, an attorney at Byrne & Storm, PC,tweeted, “No offense to @ahcastor but this claim that @cduhaime may have owned shares in Quadriga looks to be incorrect. She’s listed as the principal contact for an SPV, and the SPV is the named purchaser. A retraction is in order.”
SPV stands for special purpose vehicle, typically used by firms to isolate them from financial risk. I’ve reworded the paragraph as follows:
This 2015 British Columbia Report of Exempt Distribution, a document of Quadriga Financial Solutions’ ownership, lists Duhaime as the contact for 1207649 B.C. Ltd, which owns—or owned—20,000 shares of Quadriga. I was unable to find the corporate files for 1207649 B.C. The address in the report matches that of Duhaime’soffice.
Update (April 9): I found the corporate files. The actual company name appears to be 1027649 B.C. Ltd.—with the numbers “2” and “0” transposed. The company was founded on February 16, 2015 and dissolved on August 1, 2017. The sole director is “Anne Ellis,” and the registered office is Duhaime Law.
According tocourt documents, Cotten and Quadriga co-founder Michael Patryn had been seeking to buy back shareholdings after Quadriga’s public listing failed, so it is possible one of them may have bought back those shares as well. I reached out to Duhaime for comment a few times, but she has not responded.
Duhaime may have left Quadriga behind, but she continued to have business dealings with Patryn, who we now know is convicted felon Omar Dhanani.
She and Patryn co-founded Fintech Ventures Group, which calls itself “an investment bank focused on digital currency, blockchain, and AI-focused technology.” According to a January 2016 archive of the company’s site, Duhaime was Fintech Venture’s “Digital Finance Maven & Co-Founder.” (Interestingly, former Quadriga director Anthony Milewski worked there, too, as the company’s “Investment Relations Extraordinaire.”)
Duhaime and Patryn were also both advisors at Canadian crypto exchange Taurus Crypto Services, according to this June 2016 archive. (Milewski shows up here again, this time as an advisor.) The exchange was founded in 2014 and shut down in January 2017, when the business shifted to over-the-counter trades.
Like Duhaime, Patryn also claims his involvement with Quadriga ended in early 2016. Although the Globe and Mail said that in October 2018, “it received an e-mail pitch from an ‘executive concierge’ company called the Windsor Group offering up Mr. Patryn for interviews to discuss virtual currencies and describing him as a Quadriga director.” Patryn told the Globe he did not know what the Windsor Group was, nor had he authorized anyone to pitch him as a Quadriga director, as he never served on the board.
Patryn had a personal website michaelpatryn.com, but it got taken down. Here is a 2011 archiveand here is a 2014 archive. From 2016 on, the archives point to his LinkedIn profile, where he now goes by “Michael P.” having dropped all but the first initial of his last name. According to his LinkedIn, he has been an advisor for numerous cryptocurrency platforms going back to November 1999. I guess that means his work at Shadowcrew in 2004 and the 18 months he spent in jail for conspiracy to commit credit and bank card fraud and ID document fraud qualifies as advisory services.
Patryn appears to enjoy the limelight. Several reporters told me they had no trouble reaching him. At one point, Patryn even went into the “Quadriga Uncovered” Telegram group—basically, the lion’s den, where hundreds of pissed off Quadriga creditors sat waiting on their haunches —where I am told he calmly deflected accusations.
Elsewhere in cryptoland, there have been a number of exchanges hacks. Singapore-based exchange DragonEx was hacked on March 24 for an undisclosed amount of crypto.
Blockchain data firm Elementus suspects that Coinbene, another Singapore exchange, was also hacked. On March 25, Elementus noted that $105 million worth of crypto was on the move out of the exchange. Coinbene totally denies it’s been hacked, claiming that delays in deposits and withdrawals are due to maintenance issues.
In order to enhance the user experience, CoinBene upgraded the platform wallet on March 26, 2019. During maintenance, it will affect related operations such as deposit and withdraw, trading will not be affected.
A third exchange, Bithumb was hacked on March 30. The South Korean crypto exchange lost 3.07 million EOS and 20.2 million XRP, worth around $19 million. Bithumb thinks it was an insider job.
Helsinki-based LocalBitcoins, a once go-to for anonymous bitcoin transactions, has added know-your-customer (KYC) identity checks to comply with new laws in Finland. The change goes into effect in November. Per the company’s announcement, this is actually good news for bitcoin, because it will create a “legal status for crypto assets, which should improve significantly Bitcoin’s standing as a viable and legit financial network.”
A study by reg-tech startup Coinfirm found that 69 percent of crypto exchanges don’t have “complete and transparent” KYC procedures. And only 26 percent of exchanges had a “high” level of anti-money-laundering procedures.
With crypto markets in the dumps, exchanges are looking for new ways to attract volume. To that end, San Francisco-based Coinbase is launching a staking service to lure in institutional investors. The service, which starts with Tezos (XTZ), will pay investors to park their money in XTZ. The coins are kept in offline cold wallets. The catch is that the interest will be paid XTZ, and of course, crypto is highly volatile.
The news about Coinbase Custody supporting staking of Tezos is all over Twitter even though Coinbase hasn't even officially announced it yet. Meanwhile, the price of Tezos is up more than 70% in the last 10 days pic.twitter.com/YeYQafrfYu
Cryptocurrency exchange Binance is launching a new fiat-to-crypto exchange in Singapore later this month. (It’s been launching these crypto onramps all over the word.)
Binance also says it’s planning to launch its decentralized exchange (DEX) later this month. The DEX is built on a public blockchain, Binance Chain. Basically, Binance is looking to create an economy for binance coin (BNB), which is totally not a security.
Other interesting news bits
The the U.S. Securities and Exchange Commission issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” There is not a lot new to see here. A footnote in the document makes clear this is “not a rule, regulation, or statement of the Commission,” just some thoughts from the SEC’s staff about how they interpret existing securities laws.
Stephen Palley, partner at law firm Anderson Kill, appeared on Bloomberg sporting a beard to explain the framework—definitely worth five minutes of your time to listen to.
Justin Sun, the founder of blockchain project Tron, bungled a Tesla promotional giveaway. After a widespread cry of foul play, he decided to make it up to everyone by giving away—two Teslas. This wasn’t the first time a Tron promotion raised eyebrows.
Ernst & Young (EY), the court-appointed monitor in Quadriga’s creditor protection procedures, filed its fourth monitor report with the Supreme Court of Nova Scotia on April 1.
In the latest twist in the ongoing Quadriga saga, EY is proposing Quadriga shift from its Companies’ Creditor Arrangement Act (CCAA) proceedings into proceedings under the Bankruptcy and Insolvency Act (BIA).
Bankruptcy offers key advantages. Namely, it would remove the need for several professionals, leaving more money to repay Quadriga’s 115,000 creditors. According to court docs, $250 million CAD ($190 million USD) in crypto and fiat were on the exchange when it collapsed, but likely only a fraction of that will be found.
In a bankruptcy, EY would become a trustee. That means Quadriga’s newly appointed chief restructuring officer (CRO) would no longer be needed. Company directors, Jennifer Robertson (the widow of Quadriga’s dead CEO Gerald Cotten) and her stepfather Tom Beazley, would also step out of the picture. (Robertson has already indicated, she doesn’t want to continue serving as a director anyway, which is why she opted for a CRO.)
Quadriga also won’t be needing a representative counsel. Last month, Stewart McKelvey, stepped down from the CCAA proceedings over a potential conflict of interest. The firm was representing both Quadriga in its CCAA proceedings and handling Cotten’s estate. Quadriga has not hired a replacement—and it won’t need to for a bankruptcy.
Cox & Palmer and Miller Thomson LLP, the legal team representing Quadriga’s affected users, would stay on. The recently formed seven-person committee that serves as the voice for Quadriga’s creditors, would also continue with their work.
But here is where things get interesting—as trustee, EY would be given additional investigatory powers without further relief from the court that will be of assistance in investigating the business and affairs of Quadriga, “including the right to compel production of documents and seek examination of relevant parties under oath.”
Finally, bankruptcy would allow for the potential sale of Quadriga’s operating platform.
Preserving Robertson’s assets
In late January, after Cotten’s death and before Quadriga filed for creditor protection, Robertson was moving aggressively to protect her newly acquired assets. She moved two properties into the Seaglass Trust, and Cotten’s airplane and yacht both went up for sale. EY has put a stop to any more of this by filing an “asset preservation order.”
During the course its investigations into Quadriga’s business and affairs, EY says it became aware of occurrences where the corporate and personal boundaries between Quadriga and Cotten were not formally maintained. EY notes that it appeared “Quadriga funds may have been used to acquire assets held outside the corporate entity.”
The asset protection order involves all assets held by the Cotten Estate, Robertson and the Seaglass Trust, and Robertson Nova Property Management—the company that Robertson purchased several properties under between 2016 and 2018. The order will allow EY’s investigation of Quadriga to continue “without concern that assets possibly recoverable for the applicant’s stakeholders may be dissipated,” the report said.
Likely Robertson is agreeing to the plan because, according to the report, EY “temporarily discontinued its preparation for a mareva injunction pending the negotiation and agreement of the draft Asset Preservation Order.”
A mareva injunction would have completely frozen all of the assets. Under an asset preservation order, Robertson is able to maintain control of her properties. She just can’t sell or transfer them. She has agreed to provide a list of relevant assets to EY. And she will be working with EY on monetizing some of the assets to preserve their value.
Wrestling with third-party payment processors
Quadriga had no company bank accounts. Instead, it relied on a patchwork of third-party payment processors. As a Quadriga customer, you would send cash to one of these payment processors, and Quadriga would credit your account with Quad Bucks, which you could then use to buy crypto on the platform. When you put in a request to withdraw fiat from the exchange, a payment processor would wire you money.
After Quadriga ceased operating on January 28, several of these third-party payment processors were left holding money on behalf of Quadriga and its users. EY mentions the following payment processors in its fourth report:
The monitor has been wrestling to get funds from several of these companies, a few of which weren’t exactly at arm’s length from Quadriga. RNCI was operated by Robertson — who earlier told the court she was not involved Quadriga’s operations. Apparently Cotten used RNCI bank accounts to transfer money to Quadriga customers. Robertson is cooperating though. She says RNCI is currently not holding any Quadriga funds, and she is working to get bank statements of all transfers her company made to EY.
700964 N.B. Inc. and 1009926 B.C. Ltd. were both run by Quadriga contractors. 700964 N.B. was run by Aaron Matthews, Quadriga’s director of operations, and 1009926 B.C. was run by Aaron Vaithilingam, Quadriga’s former office manager.
EY has in its possession 1,004 bank drafts, worth $5,824,340 CAD, written out to 1009926 B.C. It had trouble depositing those checks, because 1009926 B.C., the company, had dissolved. (This is yet another example of how sloppily Quadriga handled its affairs.) Now that 1009926 B.C. has been restored, Royal Bank of Canada (RBC) is asking for additional documents to deposit the bulk drafts. But Vaithilingam is not responding to EY’s letters.
EY has also reached out to WB21, the third-party payment processor holding on to roughly $9 million USD ($12 million CAD) in Quadriga funds. WB21 recently changed its name to Black Banx, and it has an office in Canada.
EY wrote to Michael Gastauer, the sole director of WB21, in February, requesting the company return any Quadriga funds to EY. WB21 responded by saying that Quadriga’s account was was closed in December 31, 2018, and it was entitled to withhold funds if there was “reasonable doubt that the end user has engaged in fraudulent activity.” On March 9, EY wrote again requesting copies of the agreements. WB21 wrote back saying it was only holding $11.77 CAD and $5.53 USD and that it “might be able to provide further information” upon conclusion of an internal investigation.
EY is not buying it, and you can bet it’s probably had enough of these shenanigans. The monitor is convinced WB21 is holding “a significant amount of funds.” The monitor also writes that WB21 has been uncooperative and has not provided “even basic info” and that it is inappropriate for WB21 to continue holding funds pending some investigation.
Here is another surprise—EY just discovered that Jose Reyes, who runs Billerfy and Costodian, operates yet another third-party processor, which has also received funds from Quadriga. Despite all the work Reyes has done with EY trying to sort out the $26 million in Bank of Montreal (BOM) drafts, he neglected to mention his other company ePAD also held Quadriga money. EY sent letters requesting account information, but so far, Reyes has not responded. (Read the interpleader order for more history on Reyes.)
EY also wrote to POSconnect who is supposedly holding $331,764 CAD in Quadriga funds. POSconnect followed up stating that it only owed $300,000, but that under the terms of its agreement with Quadriga, it would continue holding the funds until April 28. The monitor wrote again requesting immediate return of the funds.
VoPay is supposedly holding $217,000 CAD on behalf of Quadriga. In February, VoPay told Quadriga’s counsel that it was not in a position to return the funds, because it had gotten legal threats from Quadriga customers. VoPay confirmed it is holding $116,262 CAD for Quadriga and requested indemnity from EY, which EY says it can’t provide and again requested VoPay give back the money asap.
Alto Bureau de Change is a currency exchange shopfront in Montreal. Alto believed it had never done business with Quadriga, but EY noted a transfer from Quadriga to Alto of $160,000 CAD worth of bitcoins and $30,000 CAD processed on behalf of Quadriga by NB Inc. EY believes that Alto currently holds either $20,876 or $36,213 of Quadriga funds.
EY is seeking a court order to get several of the third-party payments processors to hand over funds and/or any documentation related to Quadriga.
The monitor’s research into Quadriga’s missing funds is winding down. It plans to file its final monitor report in a few weeks. Oddly, this report did not mention anything about recovery of the platform’s historical data on AWS—a big issue in the third report.
Yesterday, I did a podcast with CoinSpice’s C. Edward Kelso. He turned it around fast, and the podcast was live a few hours later.
Kelso asked me about collapsed Canadian crypto exchange QuadrigaCX and also about legal threats made to me by WB21 (now Black Banx), the third-party payment processor holding $9 million in Quadriga funds, after I wrote about them.
WB21 has a history of threatening reporters, so this was nothing new. But after so much bad press, WB21 rebranded, and I wrote about that, too.
It is always a little overwhelming talking about Quadriga. The story is so long, involved and complex that it really belongs in a Netflix series.
The story was about how crypto exchange ShapeShift requested analytics firm CipherBlade to repeat a September 2018 report by the Wall Street Journal. The original report said ShapeShift had been used to facilitate $9 million in money laundering over a period of several years. The investigation took place before ShapeShift implemented KYC identity checks in October 2018.
After I published my story, CipherBlade founder and CSO Richard Sanders sent me a response late in the evening on March 24. What follows is his letter in full, which adds a little more background to the whole story. Thank you, Richard.
Thanks for taking the time to review some items I noticed in your article. I’ll quote particular items and provide some feedback on each.
The second WSJ report does not address what happened to Quadriga’s missing funds, only that, according to two independent researchers, some ether left the online accounts of the platform and moved through ShapeShift before Quadriga became insolvent. But the implication was the same—money laundering.
I haven’t looked into this myself, but FYI, I believe ShapeShift looked into this. If I recall correctly, these transactions were indicative of liquidity—if you can’t find the bit I’m referencing, let me know, and I’ll hunt it down for you. I’d equally be happy to review proof the WSJ provides behind their claim, but to be frank, don’t expect that to be provided by them.
To defend its reputation, ShapeShift “requested” CipherBlade, a hitherto unknown
This has been addressed in numerous articles, so I’m not sure how to appease the “requested” bit here. However, this request was done indeed—ShapeShift has been aware of CipherBlade for some time now (as most major exchanges/platforms are) and knows what we do. Regarding the ‘hitherto unknown,’ we’ve spent precisely $0.00 on marketing. In this current phase, we just don’t need to—we have more than enough requests coming our way, primarily via word of mouth. We’re quite well known by the current demographics that constitute the largest demand for our services (ICOs, exchanges, attorneys) – and while we may not yet be on the tip of the tongue of the average person in blockchain, we’re certainly well-known enough to get a stream of word of mouth referrals large enough that we can’t take all of the requests.
It is important to clarify what the new report actually says. It does not vindicate ShapeShift. It only says the laundering was less than what WSJ said. But money laundering is money laundering, and no matter how you slice or dice it, or who else is allowing it, it’s still money laundering.
I’ll start with saying that I have extensive respect for the way you worded this—the report indeed did not vindicate ShapeShift. ShapeShift was very, very aware that if our findings were damning, they’d still be our findings. However, I will disagree with the “but money laundering is money laundering” bit. There is significant importance behind analyzing the extent instances of laundering takes place on any platform. Analyzing how much money has gone through any system contingent with volume is a KPI that’s existed before blockchain was a thought, and continues to be a metric of review for anyone in the know on these topics. Obviously, in a perfect world, the amount would be $0 – but we live in a far from perfect world. If you’d like to break down percentiles of dirty funds going through other platforms, I’m keen to discuss more in-depth – but the short version is that, relative to other platforms, the percentile of laundered funds that went through ShapeShift is substantially lower, and yeah, this matters a lot.
I personally am based in Pittsburgh, and the core team is spread out mostly in Europe. This datapoint, as you linked, is from our LinkedIn, which has a location of Pittsburgh since it is much more of a tech hub and place someone may decide to meet me in person. Your other due diligence on registered office/incorporation aside, I simply find it sensible to be public-facing enough to a degree to say “hey, I’m here if anyone cares to meet.” This is more than many companies have done, and frankly, a step I think as an industry we must demand more of – so why not practice what I preach, right?
You can file “incident reports” on CipherBlade’s website. A basic report costs $100. Adding a police report brings the price to $350. The platform accepts payments in bitcoin, ether and go—the latter being an obscure coin that mainly trades on Binance. The company does accept cash, but only via bank wires.
So by now, a few other articles analyze bits about our Report function (and why it exists,) but allow me to go more in-depth with you directly: often times (and this ties into why people would pay for a Report) law enforcement doesn’t have the training on how to handle these types of incidents. Local/state police in the US often don’t even know where to direct victims (typically, would be an IC3 report) and victims (and sometimes law enforcement) often don’t know what should be in a report of one of these incidents. While I wish I had all of the time in the world to help everyone for free, I don’t – and the fees we charge for help on these reports, to be quite candid, is obviously not of a level that is highly attractive to us as a business. This may be explained better on a call, as it’s a lot to type in a brief paragraph – but the short version is that most incidents aren’t reported at all, and the few that are reported often don’t have what LE needs in them. The reports we generate give LE everything in what I like to call “a nice pretty box with a bow on it,” increasing the likelihood of action on these reports.
“Matthew [Greene] paints a picture of a company doing James Bond-level work.”
I have to chuckle a bit here, because I hear this joke on at least a weekly basis. Yeah, we do some pretty… interesting stuff, and indeed, some of it does involve tradecraft (I have and do cover both the cyber and physical realms in these cases,) but that’s pretty rare.
Sanders is the public face because his background, experience, training, and connections “hedge the risk he is exposed to,” Matthew [Greene] said. He added that Sanders likes “to joke that we should state on our website that all death threats should kindly be addressed to him directly.”
I mean, again, in fairness—I know you’re quoting Matthew here with the hedge the risk portion, but it’s simply the reality. There are indeed death threats we receive—and many in the industry get these (though, obviously, based upon angering criminals and friends of criminals, we get more,) so you’d likely have some context. The majority of these threats hold little to no merit of concern even for the average person – those making the threats are highly unlikely to act on them. However, we have done numerous reports that have identified sophisticated criminal organizations and even nationstate actors as responsible for a particular incident (actually, no less, one of these was identified via someone that filed via Report—and we identified a key logger ran by a particular organization that was benefiting a particular nationstate.)
If you do want a hilarious quote for an article, do feel free to ask me what another journalist once did – if I’m scared about this.
Where am I going with all this? Nowhere, other than, when a company issues a report that downplays money laundering on a crypto exchange, you may be interested in finding out just how that company actually knows about the subject—of money laundering, that is. The answer may surprise.
So I disagree extensively with your wording here, and here is why—all of the items regarding the company registration/incorporation have already been covered. Our knowledge of laundering primarily stems from my knowledge of laundering, drawn across an extensive case history. Without delving into cases, let’s simply say this – I can respect and appreciate the due diligence attempted on a company, and it would be fair to analyze connections in the way you did. However, to imply a company that has someone like me public-facing being knowledgeable of money laundering by premise of past history therein is a pretty insane accusation if you contemplate my background, holding of a security clearance, the fact I’m extremely public-facing (and, certainly, US Gov’t keeps tabs on what I’m doing and who I associate with)—it’s simply not a strong connection to make. I can go far more in depth about my knowledge of money laundering, whether in crypto, fiat (suitcase of cash stories?) or both—tell me what you need to know.
Lastly, I need to chuckle with you on this one…
His bio reads a bit like an Internet tough guy.
My military service making me have a label of “tough guy” (let alone internet tough guy, which, typically, is someone faking the funk and hasn’t served) isn’t warranted. In reality, I’m a huge softy. I’m continually baffled why I’m hearing multiple claims basically alluding to “badass” “tough guy” or other variations. I volunteered to do a job, and I did that job. It was my choice to do it. I expect no (nor do I want) any labels ranging from “brave” to “tough guy”—either side is just not applicable. There is courage in numerous lines of work, just like there is courage in being a journalist hunting for truth in the best interests of the public. We all have our roles. I served my role as a soldier, and I now serve my role as someone cleaning up this industry. I’m a bit baffled as to why CipherBlade, and especially in particular myself, are receiving labels that essentially amount to “scary”—the only people that need to be scared of me are people that have commit crime.
Put simply—I think that equipping you with some perspective from my end may prove beneficial to you. Make whatever revisions you see fit having had read this, and feel free to ask me any questions you have. I certainly assess you as the type receptive to getting the record straight.
Side note, props for your work on Quadriga. I was just in Toronto to do a solvency and security audit on an exchange… you know, the types of steps folks like you and I are pushing to make fair expectations. It’s a damn shame it had to come to that, but the overall vibe of transparency is reflected in both situations here.
(Sanders also wrote a lengthy response to David Gerard’s CipherBlade report.)
ShapeShift was none too pleased when the WSJ put out areport in September 2018 claiming that the crypto exchange was being used to facilitate money laundering.
In an article titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” WSJ said it did an independent investigation and learned that ShapeShift facilitated at least $9 million worth of money laundering over several years.
Founded in 2013, with headquarters in Colorado, ShapeShift made a name for itself early on by allowing anyone to instantly switch out one crypto for another—while requiringno personal information. That changed inSeptember 2018 when the firm announced it would soon require a log-in. ShapeShift didn’t specify why it added know-your-customer identity checks, but likely regulatory pressure was behind the move.
Nonetheless, the WSJ story was bad press for ShapeShift, one of the oldest of the crypto exchanges. The last thing you want when regulators have their eyes on you is to be associated with criminals. Of course, this was not the first time ShapeShift had been linked to criminal activity. In August 2017, WannaCry ransomers also tried to funnel their bitcoin through the exchange. ShapeShift responded by freezing their accounts.
Erik Voorhees, the exchange’s founder and CEO, fought back against WSJ’s claims on Twitter. “We are aware of the poorly-researched piece written against us by someone at WSJ. The implications are disingenuous and misleading,” he said when the story came out. He also posted a lengthy rebuttal online.
In February,WSJ struck again, this time stating that ShapeShift allegedly received hundreds of thousands of ether from Canadian crypto exchange QuadrigaCX in the months before its CEO, Gerald Cotten, died under mysterious circumstances, taking with him the secret to the whereabouts of 100s of millions of dollars in customer funds.
The second WSJ report does not address what happened to Quadriga’s missing funds, only that, according to two independent researchers, some ether left the online accounts of the platform and moved through ShapeShift before Quadriga became insolvent. But the implication was the same—money laundering.
To defend its reputation, ShapeShift “requested” CipherBlade, a hitherto unknown blockchain analytics company, to do a separate investigation. On Thursday, the analytics firm unveiled the results of what it said was a months-long project in aMedium post under the headline “How Truth Disappears Into the Black Hole of Shoddy Journalism.”
It what it claims was a recreation of the 2018 WSJ report, CipherBlade announced that “the WSJ’s $9 million ‘laundering’ claim was overstated by a factor of 4x.”
It is important to clarify what the new report actually says. It does not vindicate ShapeShift. It only says the laundering was less than what WSJ said. But money laundering is money laundering, and no matter how you slice or dice it, or who else is allowing it, it’s still money laundering.
it turns out that "what about THAT OTHER GUY we're not talking about" is a bad excuse in general, even if it's literally bitcoiners' favourite frickin' argument https://t.co/2MCl6Cwp1j
CipherBlade said its analysis was based upon publicly available data and that it made extensive use of the “txstat” function of ShapeShift’s public API. The company also denies that ShapeShift or anyone else paid for the investigation. “We did this as pro bono work because CipherBlade has an interest in preserving the reputation of highly compliant and helpful organizations like ShapeShift,” the firm said.
Crypto trade publications jumped on the redemptive news. “WSJ’s ShapeShift Exposé Overstated Money Laundering by $6 Million, Analysis Says,” wroteCoinDesk. (The pub also included a glowing comment from Voorhees, who said that “Crypto is bringing light, truth, and openness to finance.”) The Block published a story with the headline, “WSJ’s ShapeShift money-laundering claims greatly overstated, says CipherBlade.”
Meanwhile, Voorhees took the opportunity to once again condemn WSJ on social media. “A respectable publication would issue a retraction or correction. WSJ made up false claims against [ShapeShift] both quantitative and qualitative, in order to push an anti-crypto, pro-bank surveillance agenda. WSJ may lie, but blockchains don’t,” hetweeted.
One question nobody seemed to be asking was, “Who isCipherBlade?”
In short, CipherBlade is a firm with links to hundreds of shell companies and a director who has associations to Panama law firm Mossack Fonseca, one of the world’s largest providers of offshore financial services—but I’m sure, none of that means anything.
On its website, the eight-month-old CipherBlade claims to have “recovered millions of dollars of stolen funds, prevented dozens of ICO scams, and professionally handled PR disasters and other emergency situations.” The company was founded in August 2018.
You can file “incident reports” on CipherBlade’s website. A basic report costs $100. Adding a police report brings the price to $350. The platform accepts payments in bitcoin, ether and go—the latter being an obscure coin that mainly trades on Binance. The company does accept cash, but only via bank wires.
The only employee listed on CipherBlade’s website isRichard Sanders, the company’s chief security officer and co-founder. His bio reads a bit like an Internet tough guy. He “served in US army Special Operations Forces” and “rose to site security lead at Google.” A spokesperson for the company going by “Matthew” (no last name given) told me in an email that the company does have other employees—they just aren’t on the website.
Matthew paints a picture of a company doing James Bond-level work. Sanders is the public face because his background, experience, training, and connections “hedge the risk he is exposed to,” Mathew said. He added that Sanders likes “to joke that we should state on our website that all death threats should kindly be addressed to him directly.”
The company’s only human director is Genevieve Magnan, a 36-year-old woman, who is a citizen of Seychelles, an archipelago island off of the Indian Ocean. Seychelles is “an offshore magnet for money launderers and tax dodgers,” according to a 2014 International Consortium of Investigative Journalists (ICIJ) report.
According to her LinkedIn profile, Magnan is the corporate administrator for Seychelles-based AAA International Services, a “corporate services provider” — essentially, a company that helps other companies set themselves up in off-shore jurisdictions.
CipherBlade describes Magnan as a nominee director, whose only role is to be publicly visible in paperwork, such as the company registry. Matthew explained to me that the purpose of this company setup is to keep most of the CipherBlade team “shielded,” based on the nature of its work. “We’ve worked cases that involve very dangerous individuals and groups, including nation-state actors,” he said.
A little more digging pulls up a maze of companies. Magnan, for instance, holds shares ofSera Company, a holding company for an issuing company based in Cyprus (with a placeholder name “The Bearer”) that holds shares in 20 other companies.
Shell companies are ghost companies that have no significant assets or operations of their own. They are not illegal. In fact, ICIJ, which houses the leaked Panama Papers database—where I got a lot of the information for this story—makes it clear that “there are legitimate uses for offshore companies and trusts.”
I don’t want to suggest or imply that CipherBlade or any of the companies that it is linked to have done anything improper—as Matthew said, CipherBlade’s setup has a purpose, obviously. However, shell companies lend themselves to illegal activity. Criminals know how to use them to move money and create a house of mirrors to fool the system.
As examples, one company Magnan is listed as being a director of — Big365.com—is the recipient of a disgruntled review on Forexpeacearmy. “Jeff_calgary” claims the firm disappeared with his money. Magnan also appears to be the director of StocksM, which anotherForexpeacearmy user describes as a high-yield investment, aka ponzi, scheme.
Where am I going with all this? Nowhere, other than, when a company issues a report that downplays money laundering on a crypto exchange, you may be interested in finding out just how that company actually knows about the subject—of money laundering, that is. The answer may surprise.
you're joking right, I'm tracing Cipherblade's corporate shells within shells right now
all leading back to AAA International in the Seychelles
i mean, I can certainly believe Cipherblade have considerable expertise related to money laundering, and that you hired experts, https://t.co/mUmuEaFwXV
Travel has been a bit exhausting lately, but my talk on QuadrigaCX at the MPWR Crypto Mining Summit in Vancouver, B.C. went well. If anyone wants to learn more about the events leading to the collapse of Canada’s largest crypto exchange, I’m told the video should be up within 30 days. I’ll post as soon as it’s available.
I depend on reader support for the work I do. If you benefit from my stories and the resources I make available for free, please take a minute to subscribe to my Patreon account. Every little bit counts.
Now onto the news—first Quadriga.
Stewart McKelvey, the law firm representing Quadriga in its Companies’ Creditor Arrangement Act (CCAA) has withdrawn amid concerns of a conflict of interest. What’s weird is that nobody outside of Ernst & Young (EY), the the court-appointed monitor, knows what the “potential” conflict of interest is exactly.
The firm was also representing the estate of dead Quadriga CEO Gerald Cotten and his wife Jennifer Robertson. In and of itself, that does not necessarily represent a conflict of interest. I mean, EY would have known about this from the beginning, right? But some new info appears to have surfaced. I suspect the details will emerge eventually. We just have to keep waiting for those monitor reports to come out.
You recall my story on WB21, the payment processor holding $9 million in Quadriga funds? It seems like every reporter who has written about WB21 has received some type of threat—usually, a legal threat. (My story was also followed by threats on social media and email.)
Now a reporter has come forward saying that after he wrote a story on WB21, a thug appeared at his door. Totally unrelated, I’m sure.
Because a thug came to my home, the #fintech game has changed. Because someone is trying to scare me away from #wb21, I believe it merits more investigation.
I’m surprised more media outlets have not covered WB21 in relation to Quadriga. But I suspect that will change soon—after all, $9 million is no small change. What I still don’t get is why Quadriga did not do due diligence before partnering with the firm. The internet is littered with people claiming to have lost money on WB21. This is one more example of how irresponsibly Quadriga conducted its business.
EY should be coming out with a fourth monitor report soon. I’ll be curious to hear if they’ve gained access to Cotten’s AWS account, which contains the platform’s historical transaction data. According to court docs, the Quadriga database was backed up hourly. (You would expect a lot more frequent backups for an exchange handling hundreds of millions of dollars in customer funds.) Also, I’m curious to learn more about the role of Quadriga’s new chief restructuring officer—and what his hourly rate is. (I’m almost certain I’m in the wrong business.) And has the representative counsel pulled together a committee of jilted Quadriga users yet? Until that happens, they have no voice to represent.
In a written statement on March 13, Robertson said that Cotten had mixed his private funds with those of the exchange’s. She wrote: “While I had no direct knowledge of how Gerry operated the business, he told me that he had been putting his own money back into QCX to fund user withdrawals in 2018 while the CIBC money remained frozen.”
This is not new information. Robertson already mentioned this in her first affidavit, filed with the court on January 31. “Gerry told me that he was advancing his own personal funds in order to ensure that payments were made to Quadriga users,” she wrote. I can’t say what this means, other than more sloppy bookkeeping for EY to sort out.
Reddit users claim that the Royal Canadian Mounted Police (RCMP) is collecting info on Quadriga. “They are suspicious and are coordinating with the FBI,” Reddit user “u/e_z_p_z-” wrote in quoting someone on Telegram. I contacted RCMP to verify, but they were tight lipped on the matter. “The RCMP is aware of the allegations against QuadrigaCX. We will not be providing any further information,” a spokesperson told me.
Amidst the backdrop of the Quadriga fiasco, two Canadian financial authorities have published a consultation paper. The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIRO) are seeking input from the fintech community on how to shape regulatory requirements for crypto platforms. If you want to share your ideas, submissions are open until May 15.
I don’t think bitcoiners realize how broad of an impact the Quadriga mess will have on crypto markets. Exchanges are key to bitcoin’s liquidity, and exchanges need banking. If Canadian banks were leery of crypto-related funds in the past, now they will completely steer clear of the stuff. And my guess is regulators will do their utmost to make sure what happened at Quadriga (one guy managing gobs of other people’s money on his laptop from wherever he happened to be) never happens again—not on Canadian soil, at least.
In other crypto-exchange-related news, Tether, the company that issues the stablecoin of the same name, admitted that it is operating a fractional reserve. This has been widely suspected for a long time. Tether parted ways with its accountant in January 2018 (never a good sign), and it has never had a proper audit. Amazingly, despite this news, tether has not lost its peg and the price of bitcoin has remained unaffected.
i honestly thought the day that tether just openly admitted they don't have all the cash would be more exciting than this but lol nothing matters
David Gerard wrote a hysterical piece on Tether for DeCrypt. “Every 24 hours, the entire $2 billion supply of tethers sloshes around 3.5 times, performing vital work for the market: completing the Barts on the price charts, burning the margin traders, and keeping the game of musical chairs going just that little bit longer,” he writes.
Bitfinex’ed, the pseudonymous tweeter and persistent critic of Bitfinex, unlocked his twitter account, so you can now retweet his tweets again.
[Read my Tether timeline to learn the full history of Tether and Bitfinex, the crypto exchange that it is linked to.]
Mark Karpeles, the former CEO of Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014, was sentenced in Japan. Judges found him innocent of the major charges of embezzlement and breach of trust, but guilty of improper management of electronic funds. They gave him a suspended sentence of four years. Essentially, that means, as long as he stays out of trouble, he won’t go to jail and is a free man.
CBOE Futures Exchange (CFE), the first U.S. exchange to introduce a bitcoin futures product in December 2017, has decided to pull the plug on bitcoin futures trading.
Bitcoiners have long counted on a flood of institutional money to prop up the price of bitcoin—but it is just not happening. As the crypto markets began to tumble in 2018, CBOE saw scant trading volume on its bitcoin futures product. It also lost market share to Chicago Mercantile Exchange (CME) bitcoin futures, which launched the same month.
Bitcoiners must be so disappointed that the institutional money that was supposed to send Bitcoin to the moon and make them all billionaires never materialised. https://t.co/HJ75AUACNp
Trading volumes for bitcoin futures on both these exchanges pale in comparison to BitMEX, an unregulated exchange in Hong Kong, where you can gamble your bitcoin away at 100x leverage. (I wrote a story on BitMEX for The Block in January.)
More than six months since Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, revealed its plans for a bitcoin futures market, Bakkt is still awaiting regulatory approval.
Elsewhere, the bear market continues to take its toll on crypto exchanges.
Trading volumes on Coinbase are dropping precipitously. The Blockestimates that the U.S.-based exchange will make less than half the amount on trading commissions in 2019 than it did the prior year—if market conditions remain the same.
To make up for that, Coinbase is raising some of its trading fees. It is also listing more coins, the latest being Stellar Lumens. Stellar was started by Ripple co-founder Jed McCaleb, with lumens aimed at being part of a low-cost payment network. A bit of history here: McCaleb was the creator of Mt. Gox, which he later sold to Karpeles.
Bithumb, the largest cryptocurrency exchange in South Korea, plans to shed 150 of its 310 employees, according to CoinDesk.
And Hong-Kong based crypto exchange Gatecoin (not to be confused with crypto payment processor CoinGate) is facing liquidation. The story of Gatecoin reads like a series of Mr. Bill episodes. (Terrible things always happened to Mr. Bill.) After losing $2 million worth of crypto to a hack in 2016, the exchange hopped from three different banks only to have its bank accounts frozen at every one of them. Gatecoin gave up on the traditional banking system and turned to an unnamed French-regulated payment processor in September 2018. The firm returned the favor by keeping a large portion of Gatecoin’s funds. Now, a court has ordered the exchange to shut down.
Hong Kong Bitcoin exchange Gatecoin got scammed by a regulated payment service provider. A HK court has ordered Gatecoin to be wound up, a liquidator has been appointed. https://t.co/Xv9F4DCF4X
Stewart McKelvey, the law firm that has been representing Quadriga in its Companies’ Creditors Arrangement Act (CCAA), is stepping down due to a “potential” conflict of interest.
Maurice Chiasson, a partner at the law firm, sent aletter to the Supreme Court of Nova Scotia on March 13. He explained that his firm was stepping down in response to concerns brought up by court-appointed monitor Ernst & Young.
Stewart McKelvey was representing both Quadriga in its CCAA hearing and the estate of the firm’s dead CEO, Gerald Cotten. The letter hints that new information has surfaced since February 5, when the hearings began.
“We have been advised that the concerns regarding a potential conflict have arisen as a result of information, which has come to the attention of the monitor since the start of the CCAA process,” Chaisson said in the letter.
He adds that, “Notwithstanding that no information has been disclosed, which provides a basis to conclude there has been or is the potential for conflict, we are of the view that the appropriate course in these circumstances is to withdraw from our representation of the application companies in the CCAA process effective immediately.”
The firm will continue to represent the estate of Jennifer Robertson, Cotten’s widow.
Chetan Phull, a Toronto lawyer, who specializes in crypto and blockchain, told me it is uncertain why Stewart McKelvey is not insisting that the conflict be disclosed.
“It is even more curious why the firm believes the best course of action is to withdraw, without any evidence of a conflict or potential for conflict,” Phull said.
He noted that a conflict could arise from less obvious aspects of this case, such as whether Robertson breached a duty of care owed to the “corporate applicants” (meaning Quadriga CX) or a dispute with regard to how the firm’s legal fees should be paid.
“At the end of the day, the letter is intentionally vague, probably to avoid raising issues that would prejudice the applicants,” Phull said.
Roughly $220 million CAD ($165 million USD) is still missing or unaccounted for after Quadriga became insolvent. Meanwhile, Robertson seems to have done okay.
In a will signed weeks before his death on December 9, Cotten left an airplane, a yacht, and properties worth millions of dollars to his new bride. Robertson was also left in charge of Quadriga, since she inherited a large share of stock in the company.
Even while Quadriga users were experiencing delays in getting cash out of the exchange, Cotten and Robertson were buying up properties. Between mid-2016 and late-2018, the two bought 16 properties, worth $7.5 million CAD ($5.6 million USD), according toCBC.
Before Quadriga filed for creditor protection on January 31, Robertson removed Cotten’s name from the ownership of four Nova Scotia properties, took out collateral mortgages on all four and moved at least two of the properties into the Seaglass Trust, according to theChronicle Herald. It is not clear if Stewart McKelvey set up the trust.
Robertson is owed $300,000 CAD ($225,000 USD), which she put up to kick off the CCAA process. On March 5, the court deferred an order to pay her back.
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I will be giving a presentation on Quadriga at MPWR Crypto Mining Summit in Vancouver, B.C. on March 12 at 4:15 p.m. local time. If you lost money on Quadriga, you can get into the event for free. Simply send an email to firstname.lastname@example.org.
On the upside, seeing the hearing live at the Nova Scotia Supreme Court was really cool. Also, while in Halifax, I interviewed with Sheona McDonald, who is working on a Quadriga documentary. I hope to see her again in Vancouver, where she is based.
As far as the hearing goes, the big news is that Quadriga was granted a 45-day stay and the judge gave a thumbs up to the appointment of Peter Wedlake, a senior vice president and partner with Grant Thornton, as a chief restructuring officer (CRO) for the firm.
I was struck by the number of paid professionals sitting before the judge—somewhere between eight and nine, and a few others in the back of the room. What is the hourly rate for a lawyer? And some of them had to fly in, too.
And now, one more mouth to feed: the CRO. According to court documents, Quadriga needs a CRO for “ongoing direction” related to its affairs during its Companies’ Creditor Arrangement Act (CCAA) and in the event of an “anticipated sales process.”
This talk of selling Quadriga is a recurring theme, so watch for it to come up again. The biggest value in the sell would likely be Quadriga’s user base. A similar effort is being made to revive Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014.
in the courtroom at the Quadriga case, a reporter who came in late and sat behind us told us during intermission, "I know a few dozen people who lost mone on #QuadrigaCX; around $200, you know…nothing to go to great lengths over getting back…"
How will customer claims be evaluated? Court-appointed monitor Ernst and Young (EY) is working to gain access to the exchange’s platform data in AWS, where all the customer trades are located. (EY had to get a court order at the hearing to do so.) It will be interesting to see what the monitor finds when it cracks that egg—maybe nothing. Other trails have already been wiped clean. Quadriga has no books and six identified bitcoin cold wallets were found empty, except for an inadvertent transfer reported earlier.
I recently wrote about WB21, the shady third-party payment processor that is holding $12 million CAD ($9 million USD) in Quadriga funds, according to court documents submitted in January. After I published the story, WB21, threatened me with legal action. I responded by posting the documents they sent. Since then, I’ve been getting anonymous threats via social media and email, telling me to stop talking about Quadriga.
Kyle Torpey wrote how bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (CDA). It is possible this could deter some affected Quadriga users from registering their claims, particularly if they are worried about anyone finding out about their crypto investments.
Bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (federal tax agency). Attached are some images of the questionnaire being sent out to individuals in relation to the audits.
Elsewhere in the news, Kraken is offering a reward for any info leading to the finding of Quadriga’s lost coins. The US-based crypto exchange writes:
“It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”
Kraken’s CEO Jesse Powell has done two podcasts talking about Quadriga. Why is he so interested? If you recall, Kraken acquired Canadian crypto exchange Cavirtex in January 2016, so it has some Canadian customers. A few people I spoke with speculated that Kraken may have an interest in acquiring Quadriga’s user base. Otherwise, $100,000 USD seems like a lot of money to throw around for an exchange that let go of 57 people in September.
In a bear market where dozens of employees were laid off recently, isn't it a bit odd that Kraken are throwing around a $100k reward for this Quadriga thing? That's a big expense… what's the ROI for them? https://t.co/wGUgt0kT5j
After this post went live, Powell sent me a few comments via email. He assured me the only purpose of Kraken’s reward was to help locate more assets for the Quadriga creditors and uncover any potential foul play. I reminded him that EY is already doing its own investigation into the lost funds. As of yet, Quadriga is not a criminal case.
As for acquiring the Quadriga platform and its user base, Powell thinks the platform is worthless and the user base probably significantly overlaps with Kraken’s already. “We would be open to acquiring the client list, but it wouldn’t be for much,” he said.
He also pointed out that “a lot of money” is relative and unrelated to his firm’s earlier layoffs. “Kraken increased its profitability in September,” he said. “Would you think $100,000 USD was a lot for Amazon, who let go a few hundred people last February?”
Lest there be any lingering doubt, Globe and Mail posted convincing evidence linking Quadriga cofounder Michael Patryn to convicted felon Omar Dhanani. The two appear to be one and the same. I think we can lay that one to rest now.
Meanwhile, The Block wrote about Patryn allegedly trading large positions on BitMEX, an unregulated exchange that lets you bet on whether the price of bitcoin will go up or down. You place all your bets in bitcoin, and you can leverage up to 100x. It’s a great way to risk losing all of your money. (I wrote about BitMEX for The Block last year.) There’s been speculation as to whether Patryn was gambling with Quadriga’s customer funds.
"Michael Patryn turned out to be MikeXBT a known frequent poster on /r/bitcoinmarkets often bragging about and showing proof of his big market moving trades on Bitmex…likely with QuadrigaCX customers' money" CC @ahcastor
Earlier, Coinbase also brought up the possibility that Quadriga was operating a fractional reserve after the exchange suffered multimillion dollar losses in June 2017 due to a smart contract bug.
Wanted to share a summary of what we believe happened to QuadrigaCX. We did our own internal research, including some blockchain analytics, to see if we could help. Important to note that this is just our best guess. Take it as *pure speculation*, nothing more.
Bottom line: anything is possible. Nobody knew what was going on inside Quadriga — and they still don’t. The exchange had no official oversight and as of early-2016, only one person was in charge of that platform and all the money it held, and that was Gerald Cotten, the exchange’s now deceased CEO.
More information will come out as EY continues with its work. I can only imagine the private conversations occurring between the accountants (and lawyers) as more details in the CCAA process emerge. Welcome to crypto!
We made it to the Quadriga hearing alive. That was all I could think of when my friend and I stumbled into the Nova Scotia Supreme Courthouse on March 5, somewhat hungover, but all in one piece.
The insolvency of Quadriga, the biggest crypto exchange in Canada, is a true tale of intrigue. As a journalist, I could not get enough. My distraction was such that good sense and attention to life’s smaller details often went out the window.
A few weeks ago, Kyle Gibson, my equally Quadriga-obsessed comrade, and I thought it a great idea to drive to from our hometown of Boston to Halifax to witness the hearing firsthand. Flights to Halifax are expensive and involve lots of stops. Why not drive?
We talked about it all week—what food to bring in the car, who would be at the trial, and how many days we would stay in Canada.
I had been away all week in Los Angeles. On Sunday, March 3, I flew into Boston on a redeye—because who needs sleep? We set off that afternoon in my 2001 Honda with just enough time to make a quick stop at the liquor store.
Saddled up with beer, wine and a few bags of trail mix, we headed north. That night, we found ourselves winding through the dark backroads of Maine. Other than intermittent signs warning of us of moose, we were surrounded by scant evidence of civilization.
After crossing the border into Canada, we drove on to Saint John, New Brunswick, and stopped at a hotel. We’d made good progress—400 miles down and only 300 miles to go—and we were immensely proud of ourselves. We drank a few beers, got stoned, and promptly fell asleep.
In the morning we awoke to the sound of snow plows. “Kyle, did you check the weather forecast,” I asked, peering sleepily out the window at my snow-covered car in the parking lot below. Snow was blowing and visibility was such that you could barely see across the street.
“I’ll go clean off the car,” Kyle said, putting on his boots and jacket. We were used to rough Boston winters, but had we read the local weather reports, we would have learned that this was a serious winter storm even by Canadian standards.
A documentary filmmaker whom I was supposed to meet in Halifax sent an email. “Are you going to make it?” she wrote. “I saw all the flights in Boston were cancelled.” I wrote her back, “We are diving, so we’re fine. See you at the hearing!”
By mid-afternoon, the storm had eased, and we were on our way again. The roads were not well plowed. And the landscape looked eerily dystopian with snow covered conifers and windmills scattered in white fields of nothingness. As we drove, we noted a few 18-wheelers that had gone off the road. They looked like crippled mastodons. We thought little of it, other then, wonder what happened to them? And kept driving.
A few hours later, I was dozing in the passenger seat when I heard Kyle go, “Uh, oh, uh oh.” The car was slipping from one side of the road to the other. Like hapless observers, we watched as everything happened in slow motion. Eventually, the car went completely off the road and into the median, where it came to a muffled stop in several feet of snow.
“I’m sorry. I’m sorry,” Kyle said, shaking his head and hitting his hands against the steering wheel. “We’re fine,” I said, trying to ease his guilt. “Everything is fine.”
We were fortunate in that the roads were mostly empty, which meant there were no cars to hit us while we were swerving. But this was also a problem. Who was going to find us? I thought of the Stephen King novel “Misery,” where the writer goes off the road in a storm and gets rescued by an insane person.
Moments later, a Canadian policeman pulled up out of nowhere, and bounded out of his car. He had a bald head and big white teeth, and a gun slung low around his waist. He cheerfully told us he had been out arresting people all day when he spotted our car poking out of the snow. He wanted to check if we were okay. “Arresting people?” I said. What people was he talking about? There was virtually nothing around us.
With a big smile, he explained that only bad people come out in weather like this. He promptly called a tow truck, and within 30 minutes, we were back on the road again.
Kyle and I laughed at our little mishap, and Kyle insisted on getting behind the wheel again. “Good for you,” I said. “Back in the saddle!” Our progress continued, a little slower this time, but we were totally fine.
Also, we were armed with a new plan. If the car started skidding again, instead of breaking, we would accelerate and steer out of the situation. “That’s what you are supposed to do,” I explained. “Okay,” said Kyle. “That’s what we’ll do then.”
By the time we entered Nova Scotia, temps were warmer and the roads were free of snow. I was behind the wheel going 60 mph. But it was dark, and we had no idea we were driving on black ice.
Just like that, the car spun out of control again, but this time, the road was filled with 18 wheelers. We slid wildly back and forth across the freeway, before a 180-degree spin threw our backend into a snowbank and left us pointing into oncoming traffic. My attempts to accelerate and steer out of the situation had proven absolutely worthless.
“Jesus Christ,” I said, realizing for the first time our lives were in danger. “It’s okay!,” said Kyle, who leapt out of the car and began tossing snow out from around the tires. I jumped out, too, imagining it only a matter of time before another car hit the same patch of black ice and slammed into us. We were going to die.
A woman in a Honda CRV pulled up ahead of us and got out of her car. She was wearing yoga pants. “Are you okay?” she asked with the same cheerfulness as the police officer we had run into earlier. “We’re fine,” I said, explaining to her that we were from Boston.
“Are those winter tires or all-season?,” she asked looking at my car. All season, I told her, which is fine because all season means all seasons—and winter is a season.
She offered to call a tow, but we declined. “He’s going to dig us out,” I said pointing to Kyle who was kicking up snow. “Okay,” she said, getting back into her SUV. “I’m going to pick up my son, but if you’re still here on the way back, I’ll stop again.” As she got ready to leave, she stuck her head out the window and shouted, “Welcome to Canada!”
By then, Kyle had flung most of the snow out from around the tires. We hopped back in the car, and after lurching backward and forward a few times, managed to propel the car back onto the frozen highway and do a quick u-turn (with the front wheels still spinning on the ice) to face the right direction.
Terrified, we drove 25 mph with our hazard lights on the rest of the way to our Airbnb. When we got there, we dragged all our stuff upstairs and proceeded to drink copiously. Before heading to bed, I looked at Kyle, and said, “Welcome to Canada.”
Quadriga was granted a 45-day stay from its creditor protection deadline, and the judge gave a thumbs up, albeit reluctantly, to the appointment of a chief restructuring officer (CRO).
Canada’s largest crypto exchange was granted creditor protection on February 5, after its CEO died, leaving the company belly up. Now, a growing team of professionals are working to to track down the exchange’s fund.
In front of Nova Scotia Supreme Court Justice Michael Wood on Tuesday, sat eight or nine lawyers and representatives of court-appointed monitor Ernst and Young (EY). Some had to fly in from out of town to attend the hearing. Looking at the group, you easily grasp how Quadriga’s Companies’ Creditors Arrangement Act (CCAA) has already gone through $410,000 CAD ($307,000 USD) in professional fees.
Wood asked what would happen if the stay was not extended. “I think you would have a free for all,” said Maurice Chaisson, Quadriga’s lawyer, who is with law firm Stewart Mckelvey. Chaisson described a situation where creditors from different jurisdictions would begin filing lawsuits willy nilly. Ultimately, Wood granted the stay, telling the court, he felt Quadriga was working in good faith.
When it came to appointing a CRO—a person who would relieve Jennifer Robertson, the widow of Quadriga’s dead CEO, of some of her duties—the judge was not so easily swayed. Robertson and her stepfather Tom Beazley are the only two remaining directors of the company, after a third director, Jack Martel stepped down.
“This is another cost, another burden,” Wood said. Chaisson argued that the CRO would bring value to the CCAA process, especially if Quadriga were to be sold down the line or if “the cryptocurrency search turned out to be highly successful.” (The most recent monitor’s report identified six bitcoin cold wallets that had all been emptied.) “I think the CRO, in that circumstance, would have a useful role to play,” he said.
Chaisson was not the only one to mention the possibility of selling the platform in the future. Speaking on behalf of EY, Elizabeth Pillon, a lawyer with Stikeman Elliott, said, “at this stage, We are still in the data recovery, the asset recovery mode. This might move next into the platform monetization.” She was also in support of a CRO.
Lawyers from Miller Thomson and Cox & Palmer, the law firms representing the Quadriga users were concerned with assembling a committee to represent the creditors. “We are in a bit of a bind,” Gavin MacDonald, a partner at Cox & Palmer told the court. The official committee is not yet formed. We do not have a body from whom we can receive instructions.”
Wood emphasized he did not think the term CRO was appropriate. He described the CCAA process as a search for funds, not the restructuring of a company. In a compromise, he agreed to the appointment as long as the CRO would work at the direction of the monitor to ensure there would be no duplication of work and to keep costs to a minimum. (As a note, nobody has yet said what the CRO’s hourly fee is.)
The judge also granted an order allowing the monitor to gain access to trading platform data stored in the cloud. Quadriga’s CEO Gerald Cotten kept all of the platform on Amazon Web Servers (AWS), but he kept the AWS account in his name — not the company’s name. The data is important to verifying the claims of the creditors and determining what happened to the business prior to Cotten’s death.
Wood also deferred an order on repaying Robertson the $300,000 CAD ($225,000 USD) that she put up to kick off the CCAA process.
The next hearing is scheduled for April 18 at 9:30 a.m.
Jen and her step father have basically told EY and the court that they don't want to serve as directors during the CCAA proceedings. Not that they "can't," but just that it would be easier. for them.
Ernst and Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditor Arrangement Act (CCAA), has filed its third report in Nova Scotia Supreme Court.
The defunct crypto exchange was holding $250 million CAD ($190 million USD) in crypto and fiat at the time it went bust. EY has been trying to track down any recoverable funds—and it’s not finding much.
The majority of the recoverable money will likely come from Quadriga’s third-party payment processors. The monitor has written to 10 known payment processors requesting they hand over any funds they are holding on behalf of Quadriga. (Previously, EY identified nine payment processors. Now it has added one more, though it does not reveal the name.) Here is the grim news: since its last report filed on February 20, EY has only recovered an additional $5,000 CAD ($3,800 USD) from the payment processors.
This is in addition to the $30 million CAD ($23 million USD) EY has already recovered from the two payment processors Billerfy/Costodian and 1009926 B.C. Ltd.
More money is out there, but getting at it may be tough. As I wrote earlier, WB21 is sitting on $12 million CAD ($9 million USD), which it is refusing to relinquish. EY notes that “further relief from the court may be necessary to secure funds and records from certain of the third party processors.”
So negligent was Quadriga in its bookkeeping that it appears to have lost track of some of its money altogether. EY located a Quadriga bank account at the Canadian credit union containing $245,000 CAD ($184,000 USD). The account had been frozen since 2017.
EY also reached out to 14 other crypto exchanges looking for accounts that may have been opened by Quadriga or its dead CEO Gerald Cotten. EY did not name any of the exchanges, but four replied. One of them was holding a small amount of crypto on behalf of Quadriga, which it has handed over to EY.
I don’t know this for sure, but it is possible the exchange that returned the funds may have been Kraken.
We have thousands of wallet addresses known to belong to @QuadrigaCoinEx and are investigating the bizarre and, frankly, unbelievable story of the founder's death and lost keys. I'm not normally calling for subpoenas but if @rcmpgrcpolice are looking in to this, contact @krakenfx
[Update: I was wrong. Kraken CEO Jesse Powell says, “Nothing recovered from Kraken. So far, we have not discovered any accounts/funds believed to belong to Quadriga.”]
Two thirds of the customer funds ($180 million CAD or $136 million USD) that Quadriga held at the time of its collapse were said have been in the form of crypto located in cold, or offline, wallets that only the exchange’s dead CEO had access to. However, it is looking more and more like those funds may have never existed.
EY identified six cold wallet addresses that Quadriga used to store bitcoin in the past. Other than the sixth wallet, there have been no deposits into the identified bitcoin cold wallets since April 2018, except for the 104 bitcoin inadvertently transferred to one of them from Quadriga’s hot wallet on February 6, 2019.
Post April 2018, the sixth wallet appears to have been used to receive bitcoin from another crypto exchange account and subsequently transfer the bitcoin to the Quadriga hot wallet. The sixth wallet is currently empty. The last transaction from the sixth wallet was initiated on December 3, 2018, days before Cotten died.
The monitor also identified three other potential Quadriga cold wallet addresses used to store cryptocurrency, but provided no detail.
Quadriga apparently created 14 fake accounts on its own exchange for trading fake funds. Deposits into some of the accounts “may have been artificially created and subsequently used for trading” on the platform, the report said.
"The Monitor was further advised that deposits into certain of the Identified Accounts may have been artificially created and subsequently used for trading on the Quadriga platform."
A few other items in the monitor’s report caught my attention.
Quadriga’s platform data is stored in the cloud on Amazon Web Services (AWS). But because the account was in Cotten’s personal name and not the company’s, EY is seeking a court order to authorize access. Here is where that gets weird: EY notes that there is possibly another AWS account in the name of Jose Reyes, the principal of Billerfy. Why would a payment processor need access to Quadriga’s transaction data?
Also buried in the monitor’s report are signs EY may be getting frustrated in its dealings with Robertson and her stepfather Tom Beazley. They are the only two directors left at Quadriga. A third director, Jack Martel, resigned last month.
Recall that in her second affidavit, Robertson sought the appointment of a chief restructuring officer (CRO) for Quadriga. EY states that it “continues to see some benefit” of having someone independent of Robertson and Beazley making decisions at Quadriga.
The wording is careful, but the report goes on to say that in order for EY’s investigation “to proceed appropriately, without any conflict or appearance of any conflict,” EY needs to communicate with Quadriga “in an appropriate manner and at an appropriate time.”
Finally, less than one month in, the cost of Quadriga’s CCAA procedures now sits at $410,000 CAD ($309,000 USD).
The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.
On February 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 bitcoin to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young (EY).
When Quadriga CEO Gerald Cotten died in India on December 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—oops, make that $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.
You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth $434,068 CAD. So, yes, basically, more than half the money in the hot wallets is now gone.
EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”
Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on January 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”
A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And, surprise, surprise, it also turns out, the U.S. Securities and Exchange Commission (SEC) is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)
Quadriga’s 115,000 creditors need proper representation. On February 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.
All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not or sooner.
Chiasson: Jennifer Robertson has put in 250-thousand of the 300-thousand she’s promised to fund this process so far. But that money will run out in the next 2 weeks if not sooner.
After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.
Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc. The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.
Did you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.
I've been hearing more and more about @QuadrigaCoinEx users receiving significant withdrawals in the form of cash in nondescript packages by Canada Post. AFAIK, cash deposits were not an option. Why did Quadriga have so much cash on hand? @Bitfinexed#QuadrigaCX#seaglasstrust
Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.
But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks.
“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.”
Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.
Gerry Bot was pushing the price up on quad for YEARS! It was a giant carrot luring in new ignorant money into depositing BTC!
Finally, the Globe and Mail sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.
But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.
She told 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.”
The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.
The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.