QuadrigaCX Trustee’s Preliminary Report: “Yup, looks like 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. The 50-page report can effectively be boiled down to, “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 the exchange had 115,000 affected users, so apparently, a more accurate count is available.)

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 complete mess, and EY will probably never be able to sort everything out. The firm says “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 an unaudited information for this report.  

Tracking down the funds

The majority of EY’s report rehashes what we already know, but it is still worth a read, especially the first 14 pages. The rest is mostly appendixes.

To note, Quadriga filed for creditor protection under the Companies’ Creditors  Arrangement Act (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 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. 

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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

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News: Money laundering in real time, Binance has you covered, maybe, and Bitfinex is 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.

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TalkGold — the ponzi forum where Quadriga’s Patryn and Cotten first met

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. Now, 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 (HYIPs), 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 money off the top for him/herself. When the supply of new investors runs out, the scheme collapses.   

Screen Shot 2019-04-23 at 11.49.46 AM
Flimflam man Charles Ponzi, 1920.

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 US promptly deported him to Italy. New York financier Bernie Madoff ran a $65 billion ponzi, the largest in history. 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 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, in case you want to poke around. 

When an HYIP scheme collapses—and they always collapse—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 usually 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 (FINRA), 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 (DoJ) 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.

According to BehindMLM, the DoJ docs read:

“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.)

Screen Shot 2019-04-23 at 12.21.53 PM

If that is not enough evidence, “Patryn” 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 US 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 archived profile 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 Patryn operated. (If you read my past article, there is also evidence to suggest that Cotten 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.)

“Patryn” writes:

“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. 

Screen Shot 2019-04-23 at 2.21.23 PM

(QXCINT also tells me that one of Cotten’s email accounts—g@mailhoose.com, 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 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.

An almost identical ad with the title “Bitstamp clone – Bitcoin trading project” was posted on Freelancer.com. The job poster, who was anonymous, had 38 projects on the site. He left a few telling details behind on one of the projects:

Hi

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

Thanks

Gerry

Skype: gerrywc

email: sceptre@countermail.com.

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.”

Screen Shot 2019-04-25 at 10.09.52 AM

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!”

Screen Shot 2019-04-25 at 10.15.00 AM.png

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 ;)”

Sceptre/Lucky-Invest replies:

“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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News: Craig Wright suing more people, exchanges respond by delisting BSV, and Arwen launches

I am trying to make my news posts shorter with an effort to focus mainly on cryptocurrency exchanges, unless something else comes up that is just fun to write about. If you enjoy my stories, tips are always welcome via Patreon.

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.

Screen Shot 2019-04-19 at 9.53.58 AM
Dorian Nakamoto, one of those who turned out not to be Craig Wright.

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.)

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.

Meanwhile Gemini’s Tyler Winklevoss says Gemini never listed BSV in the first place, and Chandler Guo, a Chinese miner who has made a fortune on ICOs and Bitcoin forks, announced that he would do the opposite and list BSV.

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.

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.”

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.

 

 

Judge extends Quadriga’s creditor protection, and EY squabbles with third-party payment processor

Screen Shot 2019-04-18 at 12.45.52 PMPOSConnect, 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 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.

Thanks to TheWholeTruthXX for sending me an audio of the hearing. 

 

News: 51-foot yacht for sale, Bitfinex enables margin trading with Tether, and “Fake Satoshi” threatens legal action

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!

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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:

  • VoPay—CA$116,262.17.
  • 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.

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 listing MKR.

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. Now some 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.

Other interesting stuff

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 guidance that 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 upBcause 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.

If you’ve read this far, consider supporting me on Patreon. Writing takes time and resources, and I need your help—even if it’s only $5/month—to keep this blog going. 

 

Quadriga: Patryn, Cotten, and Midas Gold—a Liberty Reserve exchanger

Screen Shot 2019-04-09 at 5.18.37 PMThe 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? Did they meet online? Or did they have other prior business dealings?

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, is formerly Omar Dhanania convicted felon who was arrested in connection with online identity theft ring Shadowcrew.com in 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 Shadowcrew members an electronic money laundering service. Send him a Western Union money order and—for a fee of 10% of a transaction—he would filter your money through e-gold accounts. E-gold was an early centralized digital currency. Dhanani served 18 months in a US prison and got out in 2007.

The following year, Patryn, now in Canada, after the US said, “You can’t live here anymore,” began to move on with his life, picking up from where he left off. In April 2008, he founded Midas Gold Exchange. He was listed as the company’s sole director under the name “Omar Patryn,” with a company address in Calgary. A few months earlier, the digital currency exchange service launched on M-Gold.com (Here is an archive of the site taken from 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 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, AlterGold E-Currency. Midas Gold even started accepting bitcoin in June 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 the criminal underground. You could use it to anonymously transfer the system’s digital currency LR, worth $1 apiece,* to anyone else 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, silly name you wanted, because the site had virtually no KYC/AML. It did not validate identities, and you could send huge amounts of money without anyone raising an eyebrow. 

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. If you wanted to cash out of your LR, you also had to go through an exchanger. 

As an exchanger, M-Gold.com would buy LRs in bulk and sell them in smaller quantities, typically charging a 5 percent transaction fee. This setup allowed Liberty Reserve to sidestep having to collect 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.  

Cotten’s email

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 account is Omar Patryn, but the email address linked to the account is geraldcotten@gmail.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 meant profits of around $250,000—not a lot, but decent wages.

Screen Shot 2019-04-09 at 10.49.15 AM
Rank: 342, Category: Exchanger, Associated website: http://www.m-gold.com, All currencies: $5,221,489.02, LR: $5,081,353.88, Account name: Midas Gold Exchange, First name: Omar, Last name: Patryn, Email: geraldcotten@gmail.com

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, and celebritydaily.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. 

Screen Shot 2019-04-09 at 3.56.21 PM.png

Patryn’s Liberty Reserve 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 exchanges 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.

Screen Shot 2019-04-09 at 12.32.59 PM
Rank: 88, Category: Exchanger, Associated website: [field empty], All currencies: $18,653,708.71, LR: $18,416,444.50, Account type: Currency, First Name: Omar, Last Name: Patryn, email: admin@patryn.com
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.”

Ruh Roh

Screen Shot 2019-04-09 at 12.57.29 AMGood 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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