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

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

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

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

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

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

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

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

Delay, delay, delay

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

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

Bitfinex

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

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

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

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

Binance

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

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

Cryptopia, Poloniex, Coinbase

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

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

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

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

Elsewhere in Cryptoland 

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

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

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

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

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

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

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

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

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

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

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

# # #

On and (literally) off the road to Quadriga—the perilous drive to Halifax

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.”

Court grants Quadriga a 45-day stay and approves appointment of a new mouth to feed: a chief restructuring officer

Screen Shot 2019-03-06 at 3.17.26 AMQuadriga 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.

Third EY monitor’s report on Quadriga reveals empty bitcoin cold wallets and a dribbling of new funds

Screen Shot 2019-03-02 at 3.33.35 PMErnst 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. 

[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.

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).  

Diving into WB21—the company holding $9 million of Quadriga money

Screen Shot 2019-02-27 at 5.51.35 PM

A “bitcoin friendly” payment processor with a reputation for accepting bank wires and not actually processing them, is sitting on $12 million CAD ($9 million USD) of Quadriga funds.

WB21 is not showing any sign of wanting to hand over those funds either. That has some Quadriga creditors worried that more of their money has vaporized.

When Quadriga, the largest crypto exchange in Canada, went belly up earlier this year, it owed its customers $250 million CAD ($190 million USD). Two thirds of those funds are in the form of cryptocurrency stuck in cold wallets that only the company’s dead CEO Gerald Cotten held the keys to.

Meanwhile, Ernst and Young (EY), the court-appointed monitor in Quadriga’s Companies’ Creditors Arrangement Act (CCAA), is trying to round up any funds that remain. EY has contacted nine third-party payment processors that may be holding money on behalf of Quadriga. Two of them, Billerfy/Costodian and 1009926 BC LTD, are in the process of signing over $30 million CAD ($23 million USD).  

But according to an affidavit filed by Cotten’s widow Jennifer Robertson on January 31, WB21 has another roughly $9 million CAD and $2.4 million USD “but is refusing to to release the funds or respond to communications from Quadriga.”

After this story was published, Amish Patel, WB21’s global head of litigation, said in an email that the balances stated by Robertson “are not confirmed,” and that the account is “under investigation.” Patel also accused me of defamation and threatened me with legal action if I did not make several updates to my story.

So, who is WB21?

WB21 stands for “web bank 21st century.” Launched in Switzerland in late 2015, the company touts itself as a virtual bank that lets you “streamline” opening up a bank account from 180 countries. But it is really a payment processor with a shady past that Quadriga got involved with—another shady business partner, what are the odds?

In June 2016, WB21 announced that it was accepting bitcoin deposits. Send in your bitcoin, and WB21 will credit your account in fiat—though it relies on payment service BitPay to convert the bitcoin to fiat. “The funds are instantly available on the account and can be sent out by wire transfers or spent with a WB21 debit card,” WB21 says. 

The startup went on to launch a PR campaign that consisted of mainly, well, making stuff up. After 10 months of doing business, WB21 claimed it had 1 million customers and that it had sent cross-border payments totaling more than $5.2 billion.

Those number don’t really add up, especially when you consider it took Transferwise, one of the biggest London-based fintech companies, four years to get a comparable $4.5 billion in transfer money. Also, as Gruenderszene points out, in September 2016, WB21’s official app had only 100 downloads on Google’s Play Store.

In defense, WB21 CEO Michael Gastauer told Gruenderszene that WB21 doesn’t rely on its mobile app. A few hours after the conversation, Gruenderszene noted that the app disappeared from the store. 

Boasting a $2.2 billion valuation, WB21 also claimed that Gastauer sold Apax Group, a previous payments business, for $480 million, and that WB21 turned down a $50 million funding round after Gastauer invested $24 million of his own money. Kadhim Shubber at the Financial Times did some digging and found no evidence of Apax being sold.

Yet Forbes (wait, did Forbes pull that story? Try this link), The Huffington Post and Business Insider all wrote about WB21’s incredible success. Though to its credit, Business Insider later added it was “unable to independently verify these numbers.”

In late 2017, WB21 even got itself in the Wall Street Journal after announcing that it was moving its European head office from London to Berlin after the Brexit vote.

How did WB21, a company spewing so many questionable facts and figures, manage to get all this media coverage? Like another company that we’ve been hearing about lately, the payment processor leveraged the power of social media. WB21 has a Twitter account with 65,000, mostly fake, followers.

Screen Shot 2019-02-28 at 2.34.44 PMGastauer, a man in his mid-40s who hails from Germany, also appears in an impressive Youtube video at an unheard of “Global Banking Award 2018” event in Frankfurt, where he apparently won the award. Dressed elegantly in a tux, with a fog machine in the background, he gives a speech on the future of banking. “How do you come up with an idea like this?,” he says. “Do you wake up one morning thinking you want to revolutionize an 80 trillion dollar industry?”

But the truth has a way of catching up. In October 2018, the U.S. Securities and Exchange Commission (SEC) revealed a civil lawsuit accusing Gastauer of aiding and abetting the fraudulent sale of $165 million USD worth of shares in microcap stocks.

“In reality, WB21 Group was not a registered bank, and Gastauer’s ‘solution’ was actually a circumvention of banking regulations designed to disguise his clients’ [ . . .] identities,” the SEC said.

As it turns out, this was not Gastauer’s first run in with authorities. Writing again for the Financial Times, Shubber notes:

“In 2010, [Gastauer] was given an 18-month suspended sentence by a court in Switzerland for commercial fraud and counterfeiting. Around the same time, a British gambling company sued him in London for allegedly taking millions of pounds from it. He had set up a payments processor, the company claimed, but kept the payments.”

Shubber goes on to comment:

“The story of Mr Gastauer is not just about alleged wrongdoing in the financial markets; it shows how an accused fraudster might sell himself and his fantastical story using the modern tools of the internet age.”

A Google search finds the Internet littered with WB21 customers claiming the company stole their money.

In August 2018, “bitcoinjack” wrote of WB21 on Reddit, “They will accept incoming funds and credit your account but you will never be able to get it out. They will lie about outgoing payments until you give up.”

Consumer review website Trustpilot has a long list of people complaining that WB21 has taken their money and gone silent.

Quadriga customers began having trouble with WB21 about a year ago. They complained on Reddit that their bank wires were either not coming through or delayed. In response, Quadriga covered for WB21, blaming the delays on a bank in Poland that it was using:

“We used WB21 for about a week, but the vast majority of delays related to wires comes from the fact that the intermediary bank that handled CAD wires for the Polish bank cut them off due to the association with Bitcoin. We had to reissue all of these from other payment processors, all manually, which has caused delays.”

(This story was updated on March 5 to include a statement from WB21.)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Two law firms appointed to represent QuadrigaCX creditors

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

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

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

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

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

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

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

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

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

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

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

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

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

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