Judge to EY: You’re free to hand over Quadriga user data to tax collector

downloadThe 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. 

 

 

Bankruptcy trustee EY to hand over QuadrigaCX user data to Canada’s tax collector

CRAOne 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 its sixth 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.**

Personal information

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. 

Now what?

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.

Why is the CRA doing this?

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. 

Read my full Quadriga timeline here


* 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.)

The high cost of fulfilling law enforcement requests: Quadriga’s 5th trustee report

Stack of Canadian Dollar

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.

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

Photo: iStock

 

 

My story in Decrypt: “QuadrigaCX CEO traded millions in fake funds to fund luxury lifestyle, alleges trustee”

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 wrote “Bitcoin ATMs—Why Vancouver doesn’t want them”

I started digging into Bitcoin ATM machines, and the research led me to write “Bitcoin ATMs—Why Vancouver doesn’t want them.” Vancouver, as we know, does not like Bitcoin ATMs. The mayor of the city wants them banned.

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.

IMG-7392Recently, 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. 

QuadrigaCX Trustee’s Preliminary Report: Yup, your money’s all gone

Screen Shot 2019-05-20 at 9.24.58 PMErnst & 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 bank froze 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.   

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 for this 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. 

# # #

Related stories:
How the hell did we get here? A timeline of Quadriga events
Diving into WB21, the company holding $9 million of Quadriga money
EY recommends Quadriga shift to bankruptcy, moves to preserve Robertson’s assets, and wrestles with payment processors

Was this story helpful to you? Did you enjoy it? You can support my work for as little as $5 month on Patreon.

 

News: Money laundering in real time, Binance has you covered, maybe, and Bitfinex ready to IEO with LEO

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.

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”

Screen Shot 2019-05-10 at 9.39.37 PMBitfinex 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.

QuadrigaCX

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.

Elsewhere

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.

FinCEN has released a new “interpretive  guidance” for money services businesses using cryptocurrency. If you are not sure if you are a money transmitter, David Gerard breaks it down for you. Sasha Hodder also covers the new guidance in Bitcoin Magazine. And there were several tweet storms—here, here, and here.

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.”

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.

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.

# # #

My work is reader supported. If you’ve read this far, please consider becoming a patron