News: Ripple paid Moneygram $11M, weird stuff going on with e-Payments, fraudster tries to buy Perth Glory, another bitcoin ETF bites the dust

As you know, I left my most recent full-time gig, so I’m solo again. I’m going to keep on writing, but I need to figure out how to make ends meet. I’ll be writing more for my blog, possibly writing some e-books, and relying on support from patrons. If this newsletter is worth buying me a latte every four weeks, consider becoming a monthly supporter.

Now, on to the news. Since I didn’t write a newsletter last week, a few of these items stretch beyond the last seven days.

Filming for Quadriga documentary

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Filming at a coffee shop in Vancouver Monday.

If you’ve been following me on Twitter, you know I was in Vancouver all weekend filming for an upcoming Quadriga documentary for Canadian public broadcast station CBC. It was a whirlwind adventure, loads of fun, and I got to meet my idol and fellow nocoiner David Gerard for the first time. He is 6’4″, which helps explain why he is not easily intimidated by anyone. (My blog, David’s blog with more pics.)

On our second day of filming, the crew got shots of David and me at a coffee shop going through my Quadriga timeline in detail. Of course, the more we talked and went over things, the more unanswered questions we came up with.

Ripple has been paying Moneygram millions

Moneygram’s 8-K filing with the SEC must be a bit of an embarrassment for Ripple CEO Brad Garlinghouse. It reveals Ripple paid $11.3 million to Moneygram over the last two quarters. That’s in addition to the $50 million Ripple has already invested in the firm. (Cointelegraph, Coindesk.)

This is apparently the ugly truth to how Ripple works. The company appears to pay its partners to use its On-Demand Liquidity (formerly xRapid) blockchain platform and XRP tokens and then say nice things about how well things are going. (FT Alphaville)

Of course, none of this is news to @Tr0llyTr0llFace, who wrote about how Ripple pays its partners in his blog a year ago. “Basically, Ripple is paying its clients to use its products, and then pays them again to talk about how they’re using its products,” he said. 

Ripple class-action to move forward

In other Ripple news, a federal judge in Oakland, Calif., has granted in part and denied in part Ripple’s motion to dismiss a class-action lawsuit claiming the company violated U.S. securities laws. There’s a lot to unpack here, but overall it’s a win for the plaintiffs. In other words, the lawsuit will proceed even though it’s been trimmed back a bit. (Court order, CoinDesk, Bloomberg

Ripple had claimed in its November court filing that the suit could topple the $10 billion market for XRP. Well, yeah, one would think so, especially if XRP is deemed a security and gets shut down by the SEC. This class action may be laying the groundwork for that. 

Reggie Fowler gets hit with another charge

pexels-photo-2570139As if Reggie Flower did not have enough trouble on his hands. After forgoing a plea deal where three out of four charges against him would have been dropped, prosecutors have heaped on another charge — this one for wire fraud.

They allege that Fowler used ill-gotten gains from his shadow banking business, which he ran on behalf of Panamanian payment processor Crypto Capital, to fund a professional football league. The league isn’t named in the indictment, but a good guess says its the collapsed American Football League of which Fowler was a major investor. (My blog.)

The new charge should come as no surprise to those following the U.S. v. Fowler (1:19-cr-00254) case closely. In a court transcript filed in October 2019, Assistant U.S. Attorney Sebastian Swett told Judge Andrew Carter:

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

Fowler needs to go before the judge and enter his plea on the new charge before he can proceed to trial. Federal prosecutors are asking the judge to schedule arraignment for May 5, but it’s quite possible this is a typo and they meant March 5. (Court doc.)

Convicted fraudster won’t be buying Perth football team after all

LFE Founder Jim Aylward
LFE founder Jim Aylward on Twitter

The sale of Perth Glory Soccer Club to a London crypto entrepreneur fell through after it turned out that the man behind the company trying to buy Glory — businessman Jim Aylward — is convicted fraudster James Abbass Biniaz. (Imagine that, a person with a criminal past getting involved in crypto?)

Aylward had set up a group called London Football Exchange, a football stock exchange and fan marketplace powered by the LFE token. The grand scheme was for the company to buy soccer teams all over the world and integrate that business with the token.

Glory owner Tony Sage pulled out of the deal after traveling to London to go through a due diligence process with his lawyers and representatives of the London Football Exchange group. Sage had been promised $30 million by Aylward for 80% of the A-League club. (Sydney Morning Herald)

Here’s a recording of Aylward admitting the price of LFE is totally manipulated. “We control about 95% of the token holders,” he said.

Weird stuff happening with e-Payments

Something funny is going on with e-Payments, one of the biggest digital payments firms in the U.K. The London firm, which caters to the adult entertainment, affiliate marketing, and crypto industries, was ordered by the U.K.’s Financial Conduct Authority to suspend its activities as of Feb. 11 due to loose anti-money-laundering controls. That’s left ePayments’ customers unable to access their funds. Robert Courtneidge, one of its e-Payments’ directors stepped down the following week. Nobody knows why, but it looks like he was previously involved with the OneCoin scam. (FT Alphaville)

(BTW, on my flight back from Vancouver, I listened to the Missing Crypto Queen BBC podcast, which is all about OneCoin, and it’s fantastic. Definitely worth a listen.)

SEC shoots down another bitcoin ETF; Hester Pierce chimes in

In a filing posted Wednesday, the SEC set aflame another bitcoin ETF proposal. The regulator claims Wilshire Phoenix and NYSE Arca had not proven bitcoin is sufficiently resistant to fraud and market manipulation. (Their idea was to mix bitcoin and short-term treasuries to balance out bitcoin’s volatility, but the agency still wasn’t keen.) The SEC has rejected all bitcoin ETFs put before it to date, so there’s no new news here.

Predictably, though, SEC Commissioner Hester Pierce, aka “crypto mom,” filed her statement of dissent. She said the agency’s approach to bitcoin ETFs “evinces a stubborn stodginess in the face of innovation.” For some reason, Pierce seems to consistently confuse innovation with anarchy and giving bad actors free rein.

Speaking of which, she recently posted on Coindesk asking for suggestions to her ICO “safe harbor” plan. Attorney Preston Byrne responded, saying it would be hilarious if it weren’t so serious. He thinks the plan should be tossed in the bin.

Canada’s central bank venturing into e-currency

Canada’s central bank plans to lay the foundation for its own digital currency should the day arise where cash no longer rules. In a speech he gave in Montreal, Deputy Governor Tim Lane said there isn’t a compelling case to issue a central bank-backed digital currency right now, but the Bank of Canada is starting to formulate a plan in the event Canadian notes and coins go out of style. (Calgary Sun.)

Despite so many countries jumping into the game, central bank digital currencies are nothing new. They have been around since the 1990s, only nobody cared about them until Facebook’s Libra popped into the scene. Bank of Finland’s Alexi Grym recently did a podcast, where he talks about how the country launched its own Avanti project (a form of CBDC) in 1993. The idea sounded great in theory, but in practice, consumers didn’t like being charged to load the cards, especially since ATM withdrawals were free.

Drug dealer loses all his bitcoin

The problem with keeping track of the keys to your bitcoin is that it’s just too easy to lose them, as this U.K. drug dealer demonstrates. He jotted down the keys to his illicit $60 million BTC on a piece of paper. But then when he went to jail, his landlord gathered up all his belongings and took them to the dump. (Guardian.) This isn’t the first time millions of dollars worth of bitcoin have ended up in a trash heap.

FCoin insolvency bears hallmarks of funny business

Screen Shot 2020-02-26 at 9.39.31 PMFCoin, a crypto exchange based in Singapore, announced its insolvency on Feb. 17 after making the surprise discovery it was short 7,000 to 13,000 bitcoin—worth roughly $70 million to $130 million. The exchange blamed the shortage on a cacophony of errors following the launch of a controversial incentive program called “trans-fee mining.” There has been a lot of speculation that this was an outright scam. Now a new report by Anchain.ai shows BTC leaving the exchange’s cold wallets in droves right before FCoin shuttered and its founder Zhang Jian happily moved on to start a new business.

Quadriga was using Crypto Capital

The law firm representing QadrigaCX’s creditors believes the failed Canadian crypto exchange was funneling money through Crypto Capital. Financial documents that two former Quadriga users posted on Telegram show that to be true. (My blog)

Next question: Was Crypto Capital holding any Quadriga funds at the time the exchange went under? That’s going to be hard to track down given the exchange had no books.

Buffett still thinks crypto is a joke

Tron CEO Justin Sun paid $4.6 million to spend three hours with Warren Buffett and turn him into a crypto fan. He even gave the multi-billionaire some bitcoin. Turns out Buffett, promptly handed those BTC over to charity. He doesn’t want anything to do with bitcoin and still thinks crypto has zero value. “What you hope is someone else comes along and pays you more money for it, but then that person’s got the problem,” he told CNBC.

Steven Segal pays the price of being a shitcoin shill

Steven Segal thought he would bring in a little extra dough by shilling a shitcoin, but the effort backfired. The Hollywood actor has agreed to pay $314,000 to the SEC for failing to disclose payments he received for touting an ICO conducted by Bitcoiin2Gen (spelled with two “i”s) in 2018. He’ll pay a $157,000 disgorgement, plus a $157,000 fine on top.

The agency claims that Seagal failed to disclose he was promised $250,000 in cash and $750,000 worth of B2G tokens in exchange for his promotions. He even put out a cringe-worthy press release in 2018 titled “Zen Master Steven Seagal has become the brand ambassador for Bitcoiin2gen.” (SEC press release, Variety, CNBC)

Can someone check IOTA for a pulse?

How long does a blockchain need to be shut down for before it’s considered dead? How is it even possible to shut down something that is decentralized? Oh, wait, maybe it’s not.

IOTA has been offline for 14 days and counting ever since the IOTA Foundation turned off its coordinator node, which puts the final seal of approval on any IOTA currency transactions, to stop an attacker from slurping up funds from its wallet service.

The project has put together a tedious three-part series explaining the theft of its Trinity wallet, its seed migration plan and all the lessons it’s learned from the mishap. It’s all a bit mind-numbing, and you’ll feel a little dead after you read it, too.

Documents point to QuadrigaCX using payment processor Crypto Capital

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

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

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

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

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

What about GTS Germany?

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

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

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

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Links to Quadriga

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

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

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

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

Screen Shot 2020-02-11 at 8.01.17 PM

Other evidence

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

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

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

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


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

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

 

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

Stack of Canadian Dollar

Ernst & Young, the bankruptcy trustee for failed Canadian crypto exchange Quadriga, filed its fifth report of the trustee with the Ontario Superior Court of Justice on Jan. 22.

The purpose of the 79-page document was to submit the accounts of the trustee and its counsel with regard to activities involving various law enforcement officials, regulatory agencies and tax authorities. In its report, EY collectively refers these activities as “law enforcement.” 

In August 2019, EY told the court that it was getting overwhelmed with requests for material from law enforcement agencies and regulators. Collecting and producing the information is hard work and lawyers don’t come cheap. A court order on Sept. 17, 2019, solved that, giving EY the green light to continue cooperating with investigators.

EY worked with its general bankruptcy lawyer Stikeman Elliott to facilitate its cooperation with law enforcement. It also brought onboard Toronto law firm Lenczner Slaght Royce Smith Griffin for extra help in producing documents.

The volume of documents was huge, so EY put everything into a central “EDiscovery” database. At present, the database contains about 750,000 individual documents, it said.

The grand total for six months of responding to investigator inquiries came to CAD $637,156 ($484,000 USD). The costs were broken down as follows:

  • EY’s fees in connection with law enforcement activities for the period June 24, 2019, to Dec. 31, 2019, came to CAD $188,939.
  • Stikeman Elliott’s fees in connection with law enforcement activities for the period June 16, 2019, to Dec. 31, 2019, came to $133,618.
  • Lenczner Slaght’s fees in connection with law enforcement activities for the period June 25, 2019, to Dec. 31, 2019, totaled CAD $314,599.

EY said that it made “various efforts” to minimize costs and streamline the accumulation, review, and production of documents. However, it said, given the volume of documents and the time and effort required, the cost was still significant. The rest of the lengthy report spells out how the expenses were accrued.

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

Photo: iStock

 

 

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

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

CBDCs are all the rage

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

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

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

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

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

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

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

Another blow to Libra, Tether Gold, Pornhub

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

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

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

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

More WB21 stuff

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

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

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

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

Quadriga news

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

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

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

In other news

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

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

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

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

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

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

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

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

 

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

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

I suspect that the collapse of crypto exchange QuadrigaCX, which was based in Vancouver, also left a bad taste in the city’s mouth.

A source close to the matter told me that Quadriga had between two to four Bitcoin ATMs in its early days, but those were gone by 2017. The exchange was offering cash withdrawals. Where did all that cash come from? It’s own Bitcoin ATMs and later, the company had partnerships with other Bitcoin ATM operators, the source told me.

IMG-7392Recently, I visited a Bitcoin ATM in Los Angeles and spent time chatting with the owner of the machine. He told me that his machine charged a 7% transaction fee for bitcoin purchases—5% if you are selling bitcoin—and they only do ID checks for amounts over $280.

Bitcoin ATMs vary. Some charge up to 19%, and some only let you buy bitcoin and other crypto—no selling.

In other news, I am now the editor of ATM Marketplace and World of Money. I’ll be writing about cryptocurrency, but also covering ATM machines, money and payments in general. As long as I get to read, research and write all day, I’m happy. 

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

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

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

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

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

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

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

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

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

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

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

More details in the article!

# # #

 

 

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

Screen Shot 2019-05-20 at 9.24.58 PMErnst & Young (EY) has issued a Trustee’s Preliminary Report for failed Canadian crypto exchange QuadrigaCX. Essentially, the message to Quadriga’s creditors is: Most of your money is gone, and we’ll probably never find it again.

According to the report—filed on May 1, and published on EY’s website on May 10—Quadriga owes a total of CA$215 million, but it only has about CA$29 million to distribute to its 76,319 affected users. (Earlier court docs estimated 115,000 affected users. Apparently, a more accurate count is now available.)

The lengthy 50-page report mainly rehashes what we already know. But it is worth a read—especially the first 14 pages, the rest is mostly appendixes—if you need a refresher on what has happened so far. I’ll try and summarize the important bits. 

Three legal entities

The report addresses assets and debts for three legal entities: 0984750 BC Ltd (operating as QuadrigaCX) and parent companies Quadriga Fintech Solutions and Whiteside Capital Corporation. The breakdown gets a little confusing because some of the numbers overlap, but as of April 12:

  • 0984750 BC Ltd—had CA$28,649,542 and owed CA$215,697,147.
  • Quadriga Fintech Solutions—had CA$254,180 and owed CA$214,873,113.
  • Whiteside Capital—had zero assets and owed CA$214,618,937.

Quadriga’s financial affairs are a total mess, and EY will probably never be able to sort everything out. “A complete and fulsome review of Quadriga’s financial affairs will take considerable time and effort to pursue and may not be possible or cost-effective to complete.” It is relying on unaudited information for this report.  

Tracking down the funds

To note, Quadriga filed for creditor protection under the Companies’ Creditors  Arrangement Act, or CCAA, on February 5. It is currently transitioning into bankruptcy, a process that will be completed by June 28. EY is the court-appointed monitor in Quadriga’s CCAA procedures and the trustee in its bankruptcy procedures. 

Costodian: the frozen bank accounts

Most of Quadriga’s cash on hand comes from third-party payment processor Costodian. In January 2018, Costodian’s bank froze about CA$25.7 million in funds that Costodian was holding on behalf of Quadriga. Costodian later got the money back in the form of bank drafts, which it was unable to deposit because no bank would touch the funds. When Quadriga applied for creditor protection, Costodian signed over the drafts to EY, who worked with the Royal Bank of Canada to accept the drafts. EY put most of that money into a “disbursement account.”

Related to the Costodian bank drafts, there are CA$778,214 in disputed funds. Costodian claims it is entitled to unpaid processing fees. According to EY, “Quadriga takes the position that no additional fees are payable.” EY is working with Costodian’s lawyer to resolve the issue. If the parties can’t reach a compromise, they will return to court.

EY has put CA$720,000 of Quadriga’s money into a reserve account to address any final CCAA obligations. Any funds remaining in this account after the accountants and lawyers get paid will be transferred into Quadriga’s bankruptcy account. EY will include a final accounting of the CCAA’s administration in its final monitor’s report.

Hot wallet funds

Quadriga also held some crypto in its hot wallets. Those funds have been safely moved into offline cold wallet storage under EY’s control. The funds include approximately BTC 61.33, BCH 33.32, BTG 2.66, LTC, 851.73, ETH 960.36. In its report, EY estimates these funds are worth CA$500,000, but crypto prices fluctuate, so they are worth more now, and could be worth less in the future.

On February 6, before EY took control of the funds, Quadriga inadvertently sent 104 BTC from its hot wallets to its cold wallets. Those funds are as good as gone. Nobody can access Quadriga’s cold wallets, because only the company’s CEO Gerald Cotten held the keys, and he is dead.  

Bulk bank drafts

Remember the photo of 1,004 checks sitting on a stovetop? Those were known as the “bulk drafts,” worth CA$5,838,125.92. The checks were written out to 1009926 B.C. Ltd., a “third-party” (I say that tongue in cheek) payment processor run by Aaron Vaithilingam, Quadriga’s former office manager. The company had dissolved, so it was impossible to cash the checks. They apparently just sat on a stove.   

EY re-instated 1009926 B.C. Ltd., and the checks were signed over and deposited into the disbursement account on April 18. (What a surprise for this trader to learn the money was freshly sucked out of his bank account two years later!) EY held the money in the disbursement account for 30 days—in the event of any “bank recourse issues”—before sending it to Quadriga’s bankruptcy account.

Payment processors and other crypto exchanges

There is still a chance more Quadriga funds could be recovered. Quadriga money is still being held by several third-party payment processors, mainly BlackBanx (formerly WB21), which is allegedly holding CA$12 million of Quadriga funds. EY says it is continuing to work on the matter, but it doesn’t know how much it can recover.  

EY is also investigating other crypto exchanges where Quadriga supposedly stored some of its crypto. The accounting firm notes, “many of the cryptocurrency exchanges have not cooperated with the monitor’s requests to date.” EY is going to keep after them, but says it may need to seek help from law enforcement.  

Jennifer Robertson and all her properties

During the course of its investigations, EY learned that “Quadriga funds may have been used to acquire assets outside the corporate entity.” Cotten and his wife (now widow) Jennifer Robertson purchased a number of assets, including an airplane, a yacht and several properties. As a result, EY negotiated a voluntary preservation order on Robertson’s estate. EY says her assets may be worth CA$12 million. 

Robertson herself is a secured creditor, after putting up a total of CA$490,000 in pre- and post-CCAA filing advances, according to EY’s report. (The money was needed initially to kick off the CCAA process.) EY anticipates the debt will be challenged. Of course it will!

Fintech and Whiteside

A few months back, EY learned about CA$254,180 that Quadriga had tucked away in a Canadian credit union and totally forgot about—it’s only money, after all. The account, which had been frozen since 2017, was held under Quadriga Fintech Solutions, but the money pertained to Quadriga’s (0984750 BC Ltd.’s) operations.

EY writes, “The estimated net realizable value of the account receivable from the Fintech Account is net of Fintech’s estimated bankruptcy administration costs.” Bankruptcy is  apparently an expensive ordeal. As for Whiteside, it had no assets, so CA$25,000 was taken out of Quadriga’s disbursement account to fund its bankruptcy costs.

There are still questions as to what happened to CA$190 million of funds, mostly crypto, that has seemingly vanished from Quadriga. EY says it intends to file an investigative report by the end of June. Hopefully, that report will reveal more clues. 

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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

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

 

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

A lot is going on in cryptoland right now—most of it involves investigations, a New York Attorney General (NYAG) lawsuit and missing funds, but I don’t want to sound negative.

The destiny of all crypto exchanges is to be hacked, apparently. Last year, thieves stole $950 million worth of cryptocurrency from exchanges. So, in many ways, it’s not surprising to hear that Binance, the largest crypto exchange by volume, got hacked a second time.

Binance, all funds SAFU

Thieves looted more than 7,000 BTC from Binance in a single transaction. The hackers, however, are not free yet! They still need to move that $41 million worth of BTC into fiat,  a feat that typically requires layering funds into smaller and smaller amounts (generally using a script of some sort), moving it through coin mixers, and then funneling it through various exchanges until they can exit into cash. 

Thanks to blockchain, we can watch this money laundering happen real time. The first transaction out of Binance consisted of of 44 outputs. The hackers have since consolidated the bitcoin into seven addresses of mostly amounts. Now we wait.

After the hack, Binance suspended all deposits and withdrawals for seven days. Traders on the platform can’t dump their bitcoin—or their tether. If bitcoin were to crash, they would be trapped. Fortunately, bitcoin is not crashing—it’s pumping. As I write, bitcoin is now at $6,800, having shot up $1,000 within a week.

According to one expert, the boost is partially due to “a rare alignment of celestial bodies forged in an ancient supernova”—thus, number go up. Makes total sense to me.

Binance says it has an insurance policy—its SAFU fund—to cover losses on the exchange. Nobody knows for certain what is in that fund, because there has never been an outside audit, but Binance’s CEO CZ says they have enough bitcoin to cover the losses. Phew!

In a recent blog post, CZ also said the exchange is revamping its security measures, including its 2FA, API and withdrawal validation processes. Also, withdrawals and deposits should resume “early next week.”

Bitfinex’s legal woes

If you need to get up to speed with the Bitfinex and Tether saga, I covered the NYAG lawsuit in my previous newsletter. Robert-Jan den Haan also wrote a complete timeline of Bitfinex’s history with its third-party payment processor Crypto Capital.

We have podcasts, too. I discuss the Bitfinex drama with Sasha Hodder on HodlCast, and Robert talks about it with Laura Shin on her Unconfirmed podcast.

In response to the NYAG’s court order, Bitfinex submitted a motion to vacate. The NYAG filed an opposition, and Bitfinex responded. At a hearing on May 6, New York Supreme Court judge Joel M. Cohen called the preliminary injunction “amorphous and endless.” The prelim will stand, but he is giving both parties a week to sort it out.

Bitcoin was selling at a 6% premium on Bitfinex—a sign that traders are willing to pay more to get rid of their tether and get their funds off the exchange. The price of bitcoin on the exchange was so off-kilter that CoinMarketCap, a website that aggregates bitcoin pricing from top exchanges, stopped pulling from Bitfinex.

The Bitfinex premium disappeared when Binance halted withdrawals on its platform, Larry Cermak doubts it has anything to do with Binance though. He thinks it’s because Bitfinex started processing cash withdrawals again.

Twitter user “Bitfinex’ed,” disagrees. When bitcoins and tethers are stuck on Binance,  that effectively reduces the supply and makes it that much easier to pump the market, he told me. He think prices will crash when Binance reopens withdrawals.

“I am lion, hear me roar”

Screen Shot 2019-05-10 at 9.39.37 PMBitfinex has a $851 million shortfall due to issues with Crypto Capital. How is it going to fix that? Here is an idea: Why not just print more money?

The exchange’s latest plan is a token sale, or exchange traded offering (ETO), on its own platform. It will be selling a new token LEO—as in lion.

Earlier this week, iFinex, the parent company of Bitfinex, released a white paper outlining the business proposition behind the token offering. Each LEO is worth 1 USDT, which is worth $1 USD. This is not the first time Bitfinex has issued a new token to pull itself out of a financial mess. (It created a BFX token after it was hacked in 2016.)

Bitfinex shareholder Dong Zhao told CoinDesk that iFinex has received hard and soft commitments of $1 billion for the token sale. Perfect. That should definitely eleviate all of Bitfinex’s money problems.

QuadrigaCX

Ernst & Young, the trustee for failed Canadian crypto exchange QuadrigaCX, released a preliminary report describing the company’s assets and liabilities. In a nut, Quadriga has US$21 million in assets, but owes creditors US$160 million.

Elsewhere

Recently, Negocie Coins, a crypto exchange that you probably have never heard of, rose to number three on CoinMarketCap’s top exchange’s list sorted by volume. How is this even possible? Clay Collins, founder of market data company Nomics, made a video, explaining how crypto exchanges use ticker stuffing and volume spamming to game the system.

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

The FinCEN document has far reaching implications, such as, it appears Lightning Network (LN) operators qualify as money transmitters. Emin Gün Sirer says he is not surprised “given how similar LN is to hawala networks, and given the role hawala networks played in financing terrorism pre-9/11.”

The US banking committee is concerned about Facebook’s attempt at a cryptocurrency—Facebook coin—and how the social media giant is treating people’s’ financial information. It’s published an open letter with questions for Facebook.

Redditor u/BioBiro, who needed to acquire bitcoin for a totally legal purchase, complains about the rigamarole he had to go through. Among other things, “Now there’s two pictures of me and my driving license on their server for the rest of time, I guess.”

Consensus, CoinDesk’s big money maker conference, kicks off in New York next week. Last year it had 8,500 attendees, pulling in ~$17 million in ticket sales—and that’s before sponsorships. Arthur Hayes, CEO of bitcoin derivative exchange BitMEX, was one of several who rolled up to New York Hilton Midtown in a lambo.

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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, Craig Wright 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!

Screen Shot 2019-04-13 at 7.26.10 PM

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.

 

 

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 earlier that year? Did they meet online in some bitcoin chat forum? Or did they have other prior business dealings stretching even further back?

New evidence uncovered by Reddit user “QCXINT” (he’ll be posting more on Reddit soon) suggests that Cotten appears to have been involved with Patryn at Midas Gold, a Liberty Reserve exchanger, set up by Patryn in 2008.

Patryn and Midas Gold

Patryn was formerly Omar Dhanania convicted felon who was arrested in connection with online identity theft ring Shadowcrew.com in October 2004. He was 20 at the time. Working out of his home in Southern California, he was a moderator on the forum. He also offered forum members an electronic money laundering service. Send him a Western Union money order and—for a fee of 10% of a transaction—he would filter your money through e-gold accounts. E-gold was an early centralized digital currency. Dhanani served 18 months in a US prison and was released in 2007.

After the US deported him back to Canada, Patryn picked up where he left off. In April 2008, he founded Midas Gold Exchange. He was listed as the company’s sole director under “Omar Patryn,” with a company address in Calgary—though he was living in Montreal at the time. A few months earlier, the digital currency exchange service launched on M-Gold.com. (Here is an archive of the site taken in its early days, and here is an archive showing an updated design taken just before things took a dive).

In January 5, 2008, the earliest entry on the website reads:

“We have finally launched this website, and are requesting that clients place all future orders through the Contact Us page. We have, of course, been in business since 2005 and hope to continue providing you with the same great service throughout the new year. Thank you once again for your business, and have a happy New Year!”

There are no names of actual people anywhere on the site. But an October 17, 2009 entry gives the impression that a whirl of activity is going on behind the scenes.

“We apologize for the delays experienced for many clients during the course of this week. We are currently undergoing a massive corporate restructuring. During this time, some exchange directions are temporarily disabled. All pending orders should be processed within one business day.”

Digital currencies listed on the site included E-Gold, HD-Money, WebMoney, WMZ E-Currency and AlterGold E-Currency. Midas Gold had even started accepting bitcoin 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 criminals. You could use it to anonymously transfer the system’s digital currency LR, worth $1 apiece,* to anyone who had an account on the system. The system served millions of users around the world before May 2013, when it was shut down by the U.S. government.

(*All dollars listed in this article are USD)

To set up an account on libertyreserve.com, all you needed was a valid email address. You could make up whatever fake name you wanted, because the site had virtually no KYC/AML to validate identities. You could, literally, use it to send huge amounts of money around the world without anyone batting an eyebrow. 

There was one caveat. You could not fund your Liberty Reserve account directly. If you wanted to buy LR, you had to go through a third-party exchanger, such as M-Gold. Conversely, if you wanted to redeem your LR for cash, you also had to go through an exchanger. 

LR exchangers would buy LRs in bulk and sell them in smaller quantities, typically charging a 5% transaction fee. This setup allowed Liberty Reserve to avoid collecting banking information on its users, which could leave a financial trail—exactly what criminals want to avoid when choosing a digital currency. 

Liberty Reserve went into operation in 2005. Eight years later, the system had more than 5.5 million users worldwide and processed a combined value of more than $8 billion. Most of that volume came from the U.S.

During 2009 to 2013, Liberty Reserve was in full swing. These were the sunshine days of criminal activity. A huge number of transactions were related to high-yield investment programs (HYIPs)—better known as ponzis schemes—credit card trafficking, stolen ID information and computer hacking.  

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 Midas Gold account is Omar Patryn, but the email address linked to it 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 equates to 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

In addition to the Midas Gold account, Patryn had his own account on Liberty Reserve, but his account had no associated website. He appears to have had at least three other exchangers at the time—HD Money (archive) and E-cash World and Triple Exchange (archive). It’s possible he was selling LR through those sites as well as Midas Gold, and was just using the one account. Or Cotten could have operated Midas alone, while Patryn handled the other businesses.

Approximately $18.4 million worth of LR went through Patryn’s Liberty Reserve account. Of Liberty Reserve’s 500 largest accounts by volume, his ranked 88. If he took a 5 percent cut of every transaction, he would have amassed a healthy $920,000.

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. 

Did you like this story? Please support my work on Patreon, so I can keep on doing it.

 

News: EY goes after Quadriga’s payment processors, more exchange hacks, the SEC tells us what we already know

I had to take my website offline for a few hours Tuesday, so if you were searching for one of my stories and got a weird message, my apologies. I asked WordPress to downgrade my site from a business plan to a premium plan, and when they did, a bunch of my content disappeared, so I had to put Humpty-Dumpty back together again.

Big thanks to my now 18 patrons, who are making it easier for me to focus on writing about crypto. If you like my work, please consider supporting me on Patreon, so I can keep doing what I am doing.  

Now onto the news, starting with Quadriga, the defunct Canadian crypto exchange that I won’t shut up about. (Read my timeline to get up to speed.)

Ernst & Young (EY), the court-appointed monitor charged with tracking down Quadriga’s lost funds, released its fourth monitor report, which reveals more money going out then coming in. The closing cash balance for March was CA$23,268,411. Incoming cash for the month was CA$4,232, and total disbursements was CA$1,463,860—most of which was paid to professionals. A full half of that (CA$721,579) went to EY and its legal team.

EY is trying to chase down money held by Quadriga’s payment processors. It has drafted a “Third Party Payment Processor Order” for the court to approve on Monday. If that goes through as is, several payment processors, including WB21, will have five business days to handover funds and/or Quadriga documents and transaction data. If they don’t comply, they will be in contempt of court. A shift from CCAA to bankruptcy proceedings will also give EY more power to go after funds as a trustee

Christine Duhaime, a financial crimes lawyer who worked for Quadriga for six months in 2015 to early 2016, wrote “From Law to Lawlessness: Bits of the Untold QuadrigaCX” for CoinDesk, where she talks about how Quadriga went off the rails following its failed efforts to become a public company.

In the article, Duhaime—who in February called for a government bailout of Quadriga’s creditors (archive)—openly admits to having lost CA$100,000 in funds on the exchange. She claims her involvement with the exchange stopped in early 2016. “I’m glad we were let go by QuadrigaCX for being one of the ‘law and order’ folks,” she said.  

I have been corrected on detail here:

She does not mention this in her article, but in 2015, she also owned 20,000 shares of Quadriga stock. It is possible she has since sold the holdings.

Preston Byrne, an attorney at Byrne & Storm, PC, tweeted, “No offense to @ahcastor but this claim that @cduhaime may have owned shares in Quadriga looks to be incorrect. She’s listed as the principal contact for an SPV, and the SPV is the named purchaser. A retraction is in order.”

SPV stands for special purpose vehicle, typically used by firms to isolate them from financial risk. I’ve reworded the paragraph as follows:

This 2015 British Columbia Report of Exempt Distribution, a document of Quadriga Financial Solutions’ ownership, lists Duhaime as the contact for 1207649 B.C. Ltd, which owns—or owned—20,000 shares of Quadriga. I was unable to find the corporate files for 1207649 B.C. The address in the report matches that of Duhaime’s office.  

Update (April 9): I found the corporate files. The actual company name appears to be 1027649 B.C. Ltd.—with the numbers “2” and “0” transposed. The company was founded on February 16, 2015 and dissolved on August 1, 2017. The sole director is “Anne Ellis,” and the registered office is Duhaime Law.

According to court documents, Cotten and Quadriga co-founder Michael Patryn had been seeking to buy back shareholdings after Quadriga’s public listing failed, so it is possible one of them may have bought back those shares as well. I reached out to Duhaime for comment a few times, but she has not responded. 

Duhaime may have left Quadriga behind, but she continued to have business dealings with Patryn, who we now know is convicted felon Omar Dhanani

She and Patryn co-founded Fintech Ventures Group, which calls itself “an investment bank focused on digital currency, blockchain, and AI-focused technology.” According to a January 2016 archive of the company’s site, Duhaime was Fintech Venture’s “Digital Finance Maven & Co-Founder.” (Interestingly, former Quadriga director Anthony Milewski worked there, too, as the company’s “Investment Relations Extraordinaire.”) 

Duhaime and Patryn were also both advisors at Canadian crypto exchange Taurus Crypto Services, according to this June 2016 archive. (Milewski shows up here again, this time as an advisor.) The exchange was founded in 2014 and shut down in January 2017, when the business shifted to over-the-counter trades.  

Like Duhaime, Patryn also claims his involvement with Quadriga ended in early 2016. Although the Globe and Mail said that in October 2018, “it received an e-mail pitch from an ‘executive concierge’ company called the Windsor Group offering up Mr. Patryn for interviews to discuss virtual currencies and describing him as a Quadriga director.” Patryn told the Globe he did not know what the Windsor Group was, nor had he authorized anyone to pitch him as a Quadriga director, as he never served on the board.

Patryn had a personal website michaelpatryn.com, but it got taken down. Here is a 2011 archive and here is a 2014 archive. From 2016 on, the archives point to his LinkedIn profile, where he now goes by “Michael P.” having dropped all but the first initial of his last name. According to his LinkedIn, he has been an advisor for numerous cryptocurrency platforms going back to November 1999. I guess that means his work at Shadowcrew in 2004 and the 18 months he spent in jail for conspiracy to commit credit and bank card fraud and ID document fraud qualifies as advisory services.

Patryn appears to enjoy the limelight. Several reporters told me they had no trouble reaching him. At one point, Patryn even went into the “Quadriga Uncovered” Telegram group—basically, the lion’s den, where hundreds of pissed off Quadriga creditors sat waiting on their haunches —where I am told he calmly deflected accusations.

Meanwhile, I’ve been practicing my authoritative stare and baritone.

Other exchanges

Elsewhere in cryptoland, there have been a number of exchanges hacks. Singapore-based exchange DragonEx was hacked on March 24 for an undisclosed amount of crypto.

Blockchain data firm Elementus suspects that Coinbene, another Singapore exchange, was also hacked. On March 25, Elementus noted that $105 million worth of crypto was on the move out of the exchange. Coinbene totally denies it’s been hacked, claiming that delays in deposits and withdrawals are due to maintenance issues. 

A third exchange, Bithumb was hacked on March 30. The South Korean crypto exchange lost 3.07 million EOS and 20.2 million XRP, worth around $19 million. Bithumb thinks it was an insider job.

Helsinki-based LocalBitcoins, a once go-to for anonymous bitcoin transactions, has added know-your-customer (KYC) identity checks to comply with new laws in Finland. The change goes into effect in November. Per the company’s announcement, this is actually good news for bitcoin, because it will create a “legal status for crypto assets, which should improve significantly Bitcoin’s standing as a viable and legit financial network.”  

A study by reg-tech startup Coinfirm found that 69 percent of crypto exchanges don’t have “complete and transparent” KYC procedures. And only 26 percent of exchanges had a “high” level of anti-money-laundering procedures.

With crypto markets in the dumps, exchanges are looking for new ways to attract volume. To that end, San Francisco-based Coinbase is launching a staking service to lure in institutional investors. The service, which starts with Tezos (XTZ), will pay investors to park their money in XTZ. The coins are kept in offline cold wallets. The catch is that the interest will be paid XTZ, and of course, crypto is highly volatile. 

The price of XTZ went up 70 percent on the news.

Cryptocurrency exchange Binance is launching a new fiat-to-crypto exchange in Singapore later this month. (It’s been launching these crypto onramps all over the word.)

Binance also says it’s planning to launch its decentralized exchange (DEX) later this month. The DEX is built on a public blockchain, Binance Chain. Basically, Binance is looking to create an economy for binance coin (BNB), which is totally not a security.

Other interesting news bits 

Screen Shot 2019-04-05 at 11.03.29 AMThe the U.S. Securities and Exchange Commission issued a “Framework for ‘Investment Contract’ Analysis of Digital Assets.” There is not a lot new to see here. A footnote in the document makes clear this is “not a rule, regulation, or statement of the Commission,” just some thoughts from the SEC’s staff about how they interpret existing securities laws. 

Stephen Palley, partner at law firm Anderson Kill, appeared on Bloomberg sporting a beard to explain the framework—definitely worth five minutes of your time to listen to.

Justin Sun, the founder of blockchain project Tron, bungled a Tesla promotional giveaway. After a widespread cry of foul play, he decided to make it up to everyone by giving away—two Teslas. This wasn’t the first time a Tron promotion raised eyebrows.

Nocoiner David Gerard wrote a Foreign Policy piece on “How Neo-Nazis Bet Big on Bitcoin (and Lost)” that was translated for Newsweek Japan.

The ever outspoken Jackson Palmer did a good interview with Epicenter Blockchain Podcast on the history of Dogecoin and the state of cryptocurrency in 2019.

Nicholas Weaver, who gave the “Burn it with Fire” talk at Enigma, spoke to Breaker about why cryptocurrencies don’t really work as currencies.

Finally, Dream Market, the last standing marketplace from the once infamous “big four” sites that dominated dark web trading in the mid-2010s, announced plans to shut down.

 

 

EY recommends Quadriga shift to bankruptcy, moves to preserve Robertson’s assets and wrestles with payment processors

Ernst & Young (EY), the court-appointed monitor in Quadriga’s creditor protection procedures, filed its fourth monitor report with the Supreme Court of Nova Scotia on April 1.

In the latest twist in the ongoing Quadriga saga, EY is proposing Quadriga shift from its Companies’ Creditor Arrangement Act (CCAA) proceedings into proceedings under the Bankruptcy and Insolvency Act (BIA).

Bankruptcy offers key advantages. Namely, it would remove the need for several professionals, leaving more money to repay Quadriga’s 115,000 creditors. According to court docs, $250 million CAD ($190 million USD) in crypto and fiat were on the exchange when it collapsed, but likely only a fraction of that will be found.

In a bankruptcy, EY would become a trustee. That means Quadriga’s newly appointed chief restructuring officer (CRO) would no longer be needed. Company directors, Jennifer Robertson (the widow of Quadriga’s dead CEO Gerald Cotten) and her stepfather Tom Beazley, would also step out of the picture. (Robertson has already indicated, she doesn’t want to continue serving as a director anyway, which is why she opted for a CRO.)

Quadriga also won’t be needing a representative counsel. Last month, Stewart McKelvey,  stepped down from the CCAA proceedings over a potential conflict of interest. The firm was representing both Quadriga in its CCAA proceedings and handling Cotten’s estate. Quadriga has not hired a replacement—and it won’t need to for a bankruptcy. 

Cox & Palmer and Miller Thomson LLP, the legal team representing Quadriga’s affected users, would stay on. The recently formed seven-person committee that serves as the voice for Quadriga’s creditors, would also continue with their work. 

But here is where things get interesting—as trustee, EY would be given additional investigatory powers without further relief from the court that will be of assistance in investigating the business and affairs of Quadriga, “including the right to compel production of documents and seek examination of relevant parties under oath.”

Finally, bankruptcy would allow for the potential sale of Quadriga’s operating platform.

Preserving Robertson’s assets

In late January, after Cotten’s death and before Quadriga filed for creditor protection, Robertson was moving aggressively to protect her newly acquired assets. She moved two properties into the Seaglass Trust, and Cotten’s airplane and yacht both went up for sale. EY has put a stop to any more of this by filing an “asset preservation order.”

During the course its investigations into Quadriga’s business and affairs, EY says it became aware of occurrences where the corporate and personal boundaries between Quadriga and Cotten were not formally maintained. EY notes that it appeared “Quadriga funds may have been used to acquire assets held outside the corporate entity.”

The asset protection order involves all assets held by the Cotten Estate, Robertson and the Seaglass Trust, and Robertson Nova Property Management—the company that Robertson purchased several properties under between 2016 and 2018. The order will allow EY’s investigation of Quadriga to continue “without concern that assets possibly recoverable for the applicant’s stakeholders may be dissipated,” the report said.

Likely Robertson is agreeing to the plan because, according to the report, EY “temporarily discontinued its preparation for a mareva injunction pending the negotiation and agreement of the draft Asset Preservation Order.”

A mareva injunction would have completely frozen all of the assets. Under an asset preservation order, Robertson is able to maintain control of her properties. She just can’t sell or transfer them. She has agreed to provide a list of relevant assets to EY. And she will be working with EY on monetizing some of the assets to preserve their value.

Wrestling with third-party payment processors 

Screen Shot 2019-04-03 at 12.29.10 PMQuadriga had no company bank accounts. Instead, it relied on a patchwork of third-party payment processors. As a Quadriga customer, you would send cash to one of these payment processors, and Quadriga would credit your account with Quad Bucks, which you could then use to buy crypto on the platform. When you put in a request to withdraw fiat from the exchange, a payment processor would wire you money. 

After Quadriga ceased operating on January 28, several of these third-party payment processors were left holding money on behalf of Quadriga and its users. EY mentions the following payment processors in its fourth report:

  • POSconnect 
  • VoPay  
  • Billerfy     
  • Costodian  
  • ePADregistry  
  • WB21 (now Black Banx) 
  • 700964 N.B. Inc.  
  • 1009926 B.C. Ltd. 
  • Robertson Nova Consulting Inc (RNCI)
  • Alto Bureau de Change

The monitor has been wrestling to get funds from several of these companies, a few of which weren’t exactly at arm’s length from Quadriga. RNCI was operated by Robertson — who earlier told the court she was not involved Quadriga’s operations. Apparently Cotten used RNCI bank accounts to transfer money to Quadriga customers. Robertson is cooperating though. She says RNCI is currently not holding any Quadriga funds, and she is working to get bank statements of all transfers her company made to EY. 

700964 N.B. Inc. and 1009926 B.C. Ltd. were both run by Quadriga contractors. 700964  N.B. was run by Aaron Matthews, Quadriga’s director of operations, and 1009926 B.C. was run by Aaron Vaithilingam, Quadriga’s former office manager. 

EY has in its possession 1,004 bank drafts, worth $5,824,340 CAD, written out to 1009926 B.C. It had trouble depositing those checks, because 1009926 B.C., the company, had dissolved. (This is yet another example of how sloppily Quadriga handled its affairs.) Now that 1009926 B.C. has been restored, Royal Bank of Canada (RBC) is asking for additional documents to deposit the bulk drafts. But Vaithilingam is not responding to EY’s letters.

EY has also reached out to WB21, the third-party payment processor holding on to roughly $9 million USD ($12 million CAD) in Quadriga funds. WB21 recently changed its name to Black Banx, and it has an office in Canada.  

EY wrote to Michael Gastauer, the sole director of WB21, in February, requesting the company return any Quadriga funds to EY. WB21 responded by saying that Quadriga’s account was was closed in December 31, 2018, and it was entitled to withhold funds if there was “reasonable doubt that the end user has engaged in fraudulent activity.” On March 9, EY wrote again requesting copies of the agreements. WB21 wrote back saying it was only holding $11.77 CAD and $5.53 USD and that it “might be able to provide further information” upon conclusion of an internal investigation.

EY is not buying it, and you can bet it’s probably had enough of these shenanigans. The monitor is convinced WB21 is holding “a significant amount of funds.” The monitor also writes that WB21 has been uncooperative and has not provided “even basic info” and that it is inappropriate for WB21 to continue holding funds pending some investigation.

(Related story: “Diving into WB21—the company holding $9 million of Quadriga money“)

Here is another surprise—EY just discovered that Jose Reyes, who runs Billerfy and Costodian, operates yet another third-party processor, which has also received funds from Quadriga. Despite all the work Reyes has done with EY trying to sort out the $26 million in Bank of Montreal (BOM) drafts, he neglected to mention his other company ePAD also held Quadriga money. EY sent letters requesting account information, but so far, Reyes has not responded. (Read the interpleader order for more history on Reyes.)

EY also wrote to POSconnect who is supposedly holding $331,764 CAD in Quadriga funds. POSconnect followed up stating that it only owed $300,000, but that under the terms of its agreement with Quadriga, it would continue holding the funds until April 28. The monitor wrote again requesting immediate return of the funds.

VoPay is supposedly holding $217,000 CAD on behalf of Quadriga. In February, VoPay told Quadriga’s counsel that it was not in a position to return the funds, because it had gotten legal threats from Quadriga customers. VoPay confirmed it is holding $116,262 CAD for Quadriga and requested indemnity from EY, which EY says it can’t provide and again requested VoPay give back the money asap.

Alto Bureau de Change is a currency exchange shopfront in Montreal. Alto believed it had never done business with Quadriga, but EY noted a transfer from Quadriga to Alto of $160,000 CAD worth of bitcoins and $30,000 CAD processed on behalf of Quadriga by NB Inc. EY believes that Alto currently holds either $20,876 or $36,213 of Quadriga funds.

EY is seeking a court order to get several of the third-party payments processors to hand over funds and/or any documentation related to Quadriga.

The monitor’s research into Quadriga’s missing funds is winding down. It plans to file its final monitor report in a few weeks. Oddly, this report did not mention anything about recovery of the platform’s historical data on AWS—a big issue in the third report.

The next hearing is scheduled for April 8.

 

Blockchain analytics firm CipherBlade steps in to launder ShapeShift’s image

Screen Shot 2019-03-21 at 11.13.16 PMShapeShift was none too pleased when the WSJ put out a report in September 2018 claiming that the crypto exchange was being used to facilitate money laundering.

In an article titled “How Dirty Money Disappears Into the Black Hole of Cryptocurrency,” WSJ said it did an independent investigation and learned that ShapeShift facilitated at least $9 million worth of money laundering over several years.

Founded in 2013, with headquarters in Colorado, ShapeShift made a name for itself early on by allowing anyone to instantly switch out one crypto for another—while requiring no personal information. That changed in September 2018 when the firm announced it would soon require a log-in. ShapeShift didn’t specify why it added know-your-customer identity checks, but likely regulatory pressure was behind the move.

Nonetheless, the WSJ story was bad press for ShapeShift, one of the oldest of the crypto exchanges. The last thing you want when regulators have their eyes on you is to be associated with criminals. Of course, this was not the first time ShapeShift had been linked to criminal activity. In August 2017, WannaCry ransomers also tried to funnel their bitcoin through the exchange. ShapeShift responded by freezing their accounts.

Erik Voorhees, the exchange’s founder and CEO, fought back against WSJ’s claims on Twitter“We are aware of the poorly-researched piece written against us by someone at WSJ. The implications are disingenuous and misleading,” he said when the story came out. He also posted a lengthy rebuttal online.  

In February, WSJ struck again, this time stating that ShapeShift allegedly received hundreds of thousands of ether from Canadian crypto exchange QuadrigaCX in the months before its CEO, Gerald Cotten, died under mysterious circumstances, taking with him the secret to the whereabouts of 100s of millions of dollars in customer funds.  

The second WSJ report does not address what happened to Quadriga’s missing funds, only that, according to two independent researchers, some ether left the online accounts of the platform and moved through ShapeShift before Quadriga became insolvent. But the implication was the same—money laundering. 

To defend its reputation, ShapeShift “requested” CipherBlade, a hitherto unknown blockchain analytics company, to do a separate investigation. On Thursday, the analytics firm unveiled the results of what it said was a months-long project in a Medium post under the headline “How Truth Disappears Into the Black Hole of Shoddy Journalism.”

It what it claims was a recreation of the 2018 WSJ report, CipherBlade announced that “the WSJ’s $9 million ‘laundering’ claim was overstated by a factor of 4x.”  

It is important to clarify what the new report actually says. It does not vindicate ShapeShift. It only says the laundering was less than what WSJ said. But money laundering is money laundering, and no matter how you slice or dice it, or who else is allowing it, it’s still money laundering.  

CipherBlade said its analysis was based upon publicly available data and that it made extensive use of the “txstat” function of ShapeShift’s public API. The company also denies that ShapeShift or anyone else paid for the investigation. “We did this as pro bono work because CipherBlade has an interest in preserving the reputation of highly compliant and helpful organizations like ShapeShift,” the firm said

Crypto trade publications jumped on the redemptive news. “WSJ’s ShapeShift Exposé Overstated Money Laundering by $6 Million, Analysis Says,” wrote CoinDesk. (The pub also included a glowing comment from Voorhees, who said that “Crypto is bringing light, truth, and openness to finance.”) The Block published a story with the headline, “WSJ’s ShapeShift money-laundering claims greatly overstated, says CipherBlade.” 

Meanwhile, Voorhees took the opportunity to once again condemn WSJ on social media. “A respectable publication would issue a retraction or correction. WSJ made up false claims against [ShapeShift] both quantitative and qualitative, in order to push an anti-crypto, pro-bank surveillance agenda. WSJ may lie, but blockchains don’t,” he tweeted.  

One question nobody seemed to be asking was, “Who is CipherBlade?”

In short, CipherBlade is a firm with links to hundreds of shell companies and a director who has associations to Panama law firm Mossack Fonseca, one of the world’s largest providers of offshore financial services—but I’m sure, none of that means anything.  

The company is based in Pittsburgh. Its registered office is located at Nwms Center, 31 Southampton Row, London. And the company is incorporated in the Marshall Islands.

On its website, the eight-month-old CipherBlade claims to have “recovered millions of dollars of stolen funds, prevented dozens of ICO scams, and professionally handled PR disasters and other emergency situations.” The company was founded in August 2018. 

You can file “incident reports” on CipherBlade’s website. A basic report costs $100. Adding a police report brings the price to $350. The platform accepts payments in bitcoin, ether and go—the latter being an obscure coin that mainly trades on Binance. The company does accept cash, but only via bank wires.

The only employee listed on CipherBlade’s website is Richard Sanders, the company’s chief security officer and co-founder. His bio reads a bit like an Internet tough guy. He “served in US army Special Operations Forces” and “rose to site security lead at Google.” A spokesperson for the company going by “Matthew” (no last name given) told me in an email that the company does have other employees—they just aren’t on the website. 

Matthew paints a picture of a company doing James Bond-level work. Sanders is the public face because his background, experience, training, and connections “hedge the risk he is exposed to,” Mathew said. He added that Sanders likes “to joke that we should state on our website that all death threats should kindly be addressed to him directly.”

The company’s only human director is Genevieve Magnan, a 36-year-old woman, who is a citizen of Seychelles, an archipelago island off of the Indian Ocean. Seychelles is “an offshore magnet for money launderers and tax dodgers,” according to a 2014 International Consortium of Investigative Journalists (ICIJ) report

According to her LinkedIn profile, Magnan is the corporate administrator for Seychelles-based AAA International Services, a “corporate services provider” — essentially, a company that helps other companies set themselves up in off-shore jurisdictions.

CipherBlade describes Magnan as a nominee director, whose only role is to be publicly visible in paperwork, such as the company registry. Matthew explained to me that the purpose of this company setup is to keep most of the CipherBlade team “shielded,” based on the nature of its work. “We’ve worked cases that involve very dangerous individuals and groups, including nation-state actors,” he said.

A little more digging pulls up a maze of companies. Magnan, for instance, holds shares of Sera Company, a holding company for an issuing company based in Cyprus (with a placeholder name “The Bearer”) that holds shares in 20 other companies.   

Screen Shot 2019-03-21 at 11.24.04 AMShell companies are ghost companies that have no significant assets or operations of their own. They are not illegal. In fact, ICIJ, which houses the leaked Panama Papers database—where I got a lot of the information for this story—makes it clear that “there are legitimate uses for offshore companies and trusts.”

I don’t want to suggest or imply that CipherBlade or any of the companies that it is linked to have done anything improper—as Matthew said, CipherBlade’s setup has a purpose, obviously. However, shell companies lend themselves to illegal activity. Criminals know how to use them to move money and create a house of mirrors to fool the system.

As examples, one company Magnan is listed as being a director of — Big365.com—is the recipient of a disgruntled review on Forexpeacearmy. “Jeff_calgary” claims the firm disappeared with his money. Magnan also appears to be the director of StocksM, which another Forexpeacearmy user describes as a high-yield investment, aka ponzi, scheme.

Where am I going with all this? Nowhere, other than, when a company issues a report that downplays money laundering on a crypto exchange, you may be interested in finding out just how that company actually knows about the subject—of money laundering, that is. The answer may surprise.

 

Thanks to and Cas Piancey and David Gerard, who inspired and contributed to this story.

Quadriga’s representative withdraws from CCAA hearings over ‘potential’ conflict of interest

Screen Shot 2019-03-15 at 10.14.59 PMStewart McKelvey, the law firm that has been representing Quadriga in its Companies’ Creditors Arrangement Act (CCAA), is stepping down due to a “potential” conflict of interest.

Maurice Chiasson, a partner at the law firm, sent a letter to the Supreme Court of Nova Scotia on March 13. He explained that his firm was stepping down in response to concerns brought up by court-appointed monitor Ernst & Young.

Stewart McKelvey was representing both Quadriga in its CCAA hearing and the estate of the firm’s dead CEO, Gerald Cotten. The letter hints that new information has surfaced since February 5, when the hearings began.  

“We have been advised that the concerns regarding a potential conflict have arisen as a result of information, which has come to the attention of the monitor since the start of the CCAA process,” Chaisson said in the letter.  

He adds that, “Notwithstanding that no information has been disclosed, which provides a basis to conclude there has been or is the potential for conflict, we are of the view that the appropriate course in these circumstances is to withdraw from our representation of the application companies in the CCAA process effective immediately.”

The firm will continue to represent the estate of Jennifer Robertson, Cotten’s widow.

Chetan Phull, a Toronto lawyer, who specializes in crypto and blockchain, told me it is uncertain why Stewart McKelvey is not insisting that the conflict be disclosed. 

“It is even more curious why the firm believes the best course of action is to withdraw, without any evidence of a conflict or potential for conflict,” Phull said.

He noted that a conflict could arise from less obvious aspects of this case, such as whether Robertson breached a duty of care owed to the “corporate applicants” (meaning Quadriga CX) or a dispute with regard to how the firm’s legal fees should be paid.  

“At the end of the day, the letter is intentionally vague, probably to avoid raising issues that would prejudice the applicants,” Phull said.

Roughly $220 million CAD ($165 million USD) is still missing or unaccounted for after Quadriga became insolvent. Meanwhile, Robertson seems to have done okay. 

In a will signed weeks before his death on December 9, Cotten left an airplane, a yacht, and properties worth millions of dollars to his new bride. Robertson was also left in charge of Quadriga, since she inherited a large share of stock in the company.

Even while Quadriga users were experiencing delays in getting cash out of the exchange, Cotten and Robertson were buying up properties. Between mid-2016 and late-2018, the two bought 16 properties, worth $7.5 million CAD ($5.6 million USD), according to CBC.

Before Quadriga filed for creditor protection on January 31, Robertson removed Cotten’s name from the ownership of four Nova Scotia properties, took out collateral mortgages on all four and moved at least two of the properties into the Seaglass Trust, according to the Chronicle HeraldIt is not clear if Stewart McKelvey set up the trust.

Robertson is owed $300,000 CAD ($225,000 USD), which she put up to kick off the CCAA process. On March 5, the court deferred an order to pay her back.

 

News: I’m speaking in Vancouver, Kraken’s obsession with Quadriga, and Patryn may have been trading on BitMEX

Hello new readers! If you enjoy my crypto meanderings and paywall-free Quadriga resources, please subscribe to my Patreon account. I’m an independent writer, and I need your support. You can subscribe for as little as $2 a month.  

I will be giving a presentation on Quadriga at MPWR Crypto Mining Summit in Vancouver, B.C. on March 12 at 4:15 p.m. local time. If you lost money on Quadriga, you can get into the event for free. Simply send an email to community@biresearch.ca.  

I’m obviously insane to have driven to the Quadriga hearing in Halifax on March 5, given the weather conditions. I went with fellow crypto-skeptic Kyle Gibson. We spun off the road twice. It was horrifying. Apparently, my car was burning oil the entire way.  

On the upside, seeing the hearing live at the Nova Scotia Supreme Court was really cool. Also, while in Halifax, I interviewed with Sheona McDonald, who is working on a Quadriga documentary. I hope to see her again in Vancouver, where she is based. 

As far as the hearing goes, the big news is that Quadriga was granted a 45-day stay and the judge gave a thumbs up to the appointment of Peter Wedlake, a senior vice president and partner with Grant Thornton, as a chief restructuring officer (CRO) for the firm.

I was struck by the number of paid professionals sitting before the judge—somewhere between eight and nine, and a few others in the back of the room. What is the hourly rate for a lawyer? And some of them had to fly in, too. 

And now, one more mouth to feed: the CRO. According to court documents, Quadriga needs a CRO for “ongoing direction” related to its affairs during its Companies’ Creditor Arrangement Act (CCAA) and in the event of an “anticipated sales process.”  

This talk of selling Quadriga is a recurring theme, so watch for it to come up again. The biggest value in the sell would likely be Quadriga’s user base. A similar effort is being made to revive Mt. Gox, the Tokyo-based crypto exchange that went bust in 2014.

The law firms for Quadriga’s affected users have so far heard from 800 creditors—not a lot, when you consider there are 115,000 affected users. But keep in mind there is no formal claims process at the moment.   

How will customer claims be evaluated? Court-appointed monitor Ernst and Young (EY) is working to gain access to the exchange’s platform data in AWS, where all the customer trades are located. (EY had to get a court order at the hearing to do so.) It will be interesting to see what the monitor finds when it cracks that egg—maybe nothing. Other trails have already been wiped clean. Quadriga has no books and six identified bitcoin cold wallets were found empty, except for an inadvertent transfer reported earlier. 

I recently wrote about WB21, the shady third-party payment processor that is holding $12 million CAD ($9 million USD) in Quadriga funds, according to court documents submitted in January. After I published the story, WB21, threatened me with legal action. I responded by posting the documents they sent. Since then, I’ve been getting anonymous threats via social media and email, telling me to stop talking about Quadriga.  

Kyle Torpey wrote how bitcoin users in Canada are being targeted with audits by the Canada Revenue Agency (CDA). It is possible this could deter some affected Quadriga users from registering their claims, particularly if they are worried about anyone finding out about their crypto investments. 

Elsewhere in the news, Kraken is offering a reward for any info leading to the finding of Quadriga’s lost coins. The US-based crypto exchange writes:  

“It is up to our sole discretion which tips warrant a reward, if any. The total of all rewards will not exceed $100,000 USD. Kraken may end this reward program at any point in time. All leads collected by Kraken will be provided to the FBI, RCMP or other law enforcement authorities, who have an active interest in this case.”

Screen Shot 2019-03-10 at 4.11.20 PM.pngKraken’s CEO Jesse Powell has done two podcasts talking about Quadriga. Why is he so interested? If you recall, Kraken acquired Canadian crypto exchange Cavirtex in January 2016, so it has some Canadian customers. A few people I spoke with speculated that Kraken may have an interest in acquiring Quadriga’s user base. Otherwise, $100,000 USD seems like a lot of money to throw around for an exchange that let go of 57 people in September.

After this post went live, Powell sent me a few comments via email. He assured me the only purpose of Kraken’s reward was to help locate more assets for the Quadriga creditors and uncover any potential foul play. I reminded him that EY is already doing its own investigation into the lost funds. As of yet, Quadriga is not a criminal case.

As for acquiring the Quadriga platform and its user base, Powell thinks the platform is worthless and the user base probably significantly overlaps with Kraken’s already. “We would be open to acquiring the client list, but it wouldn’t be for much,” he said.

He also pointed out that “a lot of money” is relative and unrelated to his firm’s earlier layoffs. “Kraken increased its profitability in September,” he said. “Would you think $100,000 USD was a lot for Amazon, who let go a few hundred people last February?”

Lest there be any lingering doubt, Globe and Mail posted convincing evidence linking Quadriga cofounder Michael Patryn to convicted felon Omar Dhanani. The two appear to be one and the same. I think we can lay that one to rest now. 

Meanwhile, The Block wrote about Patryn allegedly trading large positions on BitMEX, an unregulated exchange that lets you bet on whether the price of bitcoin will go up or down. You place all your bets in bitcoin, and you can leverage up to 100x. It’s a great way to risk losing all of your money. (I wrote about BitMEX for The Block last year.) There’s been speculation as to whether Patryn was gambling with Quadriga’s customer funds.

Earlier, Coinbase also brought up the possibility that Quadriga was operating a fractional reserve after the exchange suffered multimillion dollar losses in June 2017 due to a smart contract bug.

Bottom line: anything is possible. Nobody knew what was going on inside Quadriga — and they still don’t. The exchange had no official oversight and as of early-2016, only one person was in charge of that platform and all the money it held, and that was Gerald Cotten, the exchange’s now deceased CEO.  

More information will come out as EY continues with its work. I can only imagine the private conversations occurring between the accountants (and lawyers) as more details in the CCAA process emerge. Welcome to crypto!

Read “How the hell did we get here: a timeline of Quadriga events” for the full story.

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.”

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.)

 

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.

News: Quadriga, Quadriga, Quadriga

The news keeps getting worse for QuadrigaCX creditors. The Canadian crypto exchange has apparently jettisoned another $468,675 CAD worth of bitcoin into deep space.

On February 6, literally, one day after Quadriga applied for creditor protection, the exchange “inadvertently” sent 104 bitcoin to its dead CEO’s cold wallet, according to an initial report released by court-appointed monitor Ernst & Young (EY).

When Quadriga CEO Gerald Cotten died in India on December 9, he carried into the afterlife with him the keys to the exchange’s cold wallets, where $180 million CAD—oops, make that $180.5 million CAD—worth of crypto is stored. Unless Cotten springs from the grave, any crypto in those wallets is as good as gone.

You have to scratch your head till it bleeds on that one. Why was anyone at Quadriga allowed to touch those coins after the company applied for creditor protection? EY is now moving to safeguard the remaining crypto, a stash now down to 51 bitcoin, 33 bitcoin cash, 2,032 bitcoin gold, 822 litecoin, and 951 ether, worth $434,068 CAD. So, yes, basically, more than half the money in the hot wallets is now gone.

(To get the full details on the history of the exchange, read my article How the hell did we get here? A timeline of Quadriga events.)

EY is also working to retrieve about $30 million worth of cash from nine Quadriga payment processors. So far, EY has yet to collect a dime, and one of the processors is stubbornly insisting that “it has the right to continue to hold funds in its possession pursuant to the terms of its agreement with the Applicants.”

Which payment processor would that be then? How about WB21? According to Robertson’s affidavit filed on January 31, WB21 is holding roughly $9 million CAD and $2.4 million USD of the exchange’s money. Even before EY took over, WB21 was “refusing to release the funds or respond to communications from Quadriga.”

A quick Google search reveals that WB21 has long been plagued by accusations that it is a scam. A year ago, Quadriga customers were complaining on Reddit that they were having trouble getting their wires from WB21. And, surprise, surprise, it also turns out, the U.S. Securities and Exchange Commission (SEC) is suing WB21’s CEO for fraud. (You can find the full SEC complaint here.)

Quadriga’s 115,000 creditors need proper representation. On February 14, three legal teams appeared in court to vie for the position of representative counsel. Nova Scotia Supreme Court Judge Michael Wood said he plans to have a final decision next week.

All this legal stuff is getting expensive. So far, Robertson has put up $250,000 CAD of the $300,000 CAD she promised in her affidavit to fund the CCAA process. And the funds are being gobbled up quick. Quadriga’s lawyer Maurice Chiasson said the money will run out in two weeks, if not or sooner.

After that, where will the money come from? Likely, out of whatever funds EY pulls from those nine payment processors.

Meanwhile, more funny business is starting to surface. In her sworn affidavit, Cotten’s widow stated that she had no dealings with Quadriga prior to Cotten’s death. Yet, three Quadriga creditors (archive) claim they received wires from Robertson’s real estate company, Robertson Nova Property Inc. The wire transactions occurred in 2016 and 2017. This is interesting, given Jennifer only changed her name to Robertson in April 2017.

Screen Shot 2019-02-15 at 9.04.16 PMDid you know that if you wanted to cash out of Quadriga, you could opt to have actual boxes of cash dropped off at your door? That was an actual service Quadriga offered its customers. A few have suggested that the money may have come from bitcoin ATM machines that Quadriga operated.

Remember, Quadriga had no corporate banking. That is why, when you sold bitcoin for cash on the exchange or wired in money via one of Quadriga’s payment processors, your online wallet was credited with QuadrigaCX Bucks—not real bucks.

But who knew? I’ve been speaking to Quadriga creditors and some of them had no clue that the “CAD” they saw in their online wallets was basically Quad Bucks. 

“Everyone knows CAD equals Quad bucks now, but I didn’t know that until after the implosion,” one creditor who preferred to remain anonymous told me. “I guess it was in the terms [and conditions], but it wasn’t marked Quad bucks.” 

Some traders also told me that bitcoin sold for a premium on Quadriga. That meant, you could buy bitcoin on another exchange, such as Kraken, and then sell it for a profit on Quadriga. As an added incentive to move your crypto onto the exchange, Quadriga also offered free cash withdrawals, as long as you did not mind waiting two weeks or so for the money to hit your bank account. You had to pay a fee for express withdrawals.

Finally, the Globe and Mail sent its investigative reporters to India, where Cotten and his wife celebrated their honeymoon just before Cotten died. People are still wondering if his death was staged. “That Mr. Cotten did indeed die is a certainty among police and medical professionals in India, and The Globe reviewed hotel, hospital and embalming records that give no suggestion of anything abnormal,” the Globe writes.

But why was Cotten’s body taken from the hospital where he died back to the hotel where he had been staying? (According to Cotten’s death certificate, Fortis Escorts Hospital was the place of death.) Partly because of this, Simmi Mehra, who works at Mahatma Gandhi Medical College & Hospital, refused to embalm the body.

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

The Globe and Mail report also reveals tragic details of the oft-overlooked Angel House orphanage that Cotten and Robertson sponsored. Apparently, the money they donated only paid for building materials. Several doors are still missing from the structure, including one to the toilet. And the operator of the orphanage is sinking into debt.

The orphanage appears to be yet another example of the wake of destruction that Cotten, who otherwise lived as though money were no object, carelessly left in his passing.

 

 

News: ETC hacker returns some of the money, Constantinople will have to wait, and a new twist in the QuadrigaCX saga

Stealing money is not easy. So why go to all the effort if you’re not serious? Screen Shot 2019-01-20 at 12.41.31 AM.png

Earlier this month, Ethereum Classic fell victim to a 51% attack when someone got hold of the majority of the network’s computing power and used it to double spend coins, stealing $1 million in funds. Now the hacker has returned some of the money. 

Gate.io, which originally lost $271,000 worth of ETC said the hacker returned $100,000 worth. And YoBit reported it got back $61,000 of $65,000 worth of stolen ETC. 

“We still don’t know the reason [for the return],” Gate.io said in a blog post on January 10. “If the attacker didn’t run it for profit, he might be a white hacker who wanted to remind people the risks in blockchain consensus and hashing power security.”

If you are a crypto exchange, you’re probably not seeing the profits you did back in the crypto heydays of 2017 and early 2018. So how do you make up for that? One option is to start listing lots of questionable coins. Another is to set the stage for the long-hoped-for influx of institution money.

Along those lines, Bittrex announced an over-the-counter (OTC) desk on January 14. The service handles trades of $250,000 or greater for the nearly 200 coins already offered by the exchange. In doing so, Bittrex joins other U.S.-based exchanges in launching OTC trading desks, including Coinbase and Poloniex.

Ethereum’s Constantinople upgrade has been delayed yet again. Shortly before the scheduled January 17 release, smart contract audit firm ChainSecurity found vulnerabilities in one of five ethereum improvement proposals (EIP). ChainSecurity describes the vulnerability in detail here. Ethereum core developers are now weighing late February as a time to move ahead with the upgrade—sans the buggy EIP.

A new twist has emerged in the saga of QuadrigaCX, one of the largest crypto exchanges in Canada. The saga began in January 2018 when the Canadian Imperial Bank of Commerce froze about $22 million in US dollars in an account opened by Quadriga’s payment processor. The majority of the frozen funds were released in December, but customers still aren’t getting their money.

Now, after waiting more than a month to post the news, Quadriga says that its CEO and founder Gerald Cotten is dead. Usually, when the CEO of a company dies, that is something you want to tell people right away.   

The announcement (archive) on the company’s website appears to come from Cotten’s wife, Jennifer Robertson, who explains that Cotten went to India to build an orphanage for needy children. While there, he died of complications to Crohn’s disease.  

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

Several of Quadriga’s customers went to Reddit asking for proof of Cotten’s death. Some wondered how Cotten found time to travel to India when his company was in the midst of major litigation. 

Binance, one of the world’s largest crypto exchanges by trading volume, has launched a  fiat-to-crypto exchange in Jersey. A tiny 5-by-9-mile island in the English Channel, Jersey is one of the world’s wealthiest offshore tax shelters.

In October, Binance also set up a fiat-to-crypto exchange in Uganda. And it is planning to set up more of these entities in countries like Singapore, Malta, South Korea, Liechtenstein, Argentina, Russia, Turkey, and Bermuda.

Tron’s accelerator developer contest is looking like a big scam. The event was supposed to offer $1 million in prizes, with the first prize being $200,000. After the competition ended on January 4, developers took to Twitter and Reddit to complain that something “fishy” was going on. Apparently, Tron changed the prize amounts, and the main prize went to some vague company nobody has ever heard of.  

Brave browser, the project run by JavaScript creator and former Mozilla CEO Brendan Eich, claims that is is no longer fundraising on behalf of others, after releasing version 0.58.21 of the browser. David Gerard wrote an update and posted some pics of the new interface. If you get a chance, tip Gerard some BAT via his YouTube channel, so he can continue to test out the platform.  

Also, Brave browser has started allowing developers and testers to view ads. You can’t earn BAT for viewing the ads yet, but all that is coming. Eventually, Brave says, “users will then be able to earn 70% of the revenue share coming from those ads.”

The business model has gotten a ton of criticism. Essentially, the browser strips all ads and add trackers — which is how most publishing sites make their money — and then substitutes its own Brave-approved ads.

There’s been some important developments in the Tezos class-action litigation. Next up, likely the court will rule on whether the Tezos initial coin offering—which raised a record-setting $232 million in mid-2017—was an unregistered securities offering.

A ransomware threat known as Ryuk has pulled in $3.7 million in bitcoin over five months.

The Winklevoss Twins still think Bitcoin will be worth more than gold, maybe in the hopes they will be billionaires again. “The only thing gold has over bitcoin is a 3,000 year head start,” Cameron told Fortune.  

Brock Pierce, who got into cryptocurrency in the early days, and his wife Crystal Rose Pierce are expecting a child in March. They are naming the baby Crypto Pierce.

About 5% of daily Bitcoin transactions involve tether (USDT), according to a Medium post by Omni, the platform that tether operates on.  

Despite competition from a slew of new stablecoins, tether still dominates the stablecoin market, according to the latest report from CryptoCompare.

In case you missed it, I published a complete Tether timeline. I’m continuing to to update the story based on whatever new info I stumble upon. So keep checking back—and if you have information to add, send me details!