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QuadrigaCX Ended Up Running a Ponzi Scheme

Just like the rest of the world, the cryptocurrency ecosystem is no stranger to scams. One of the most well known scams as of late, is the QuadrigaCX scandal. QuadrigaCX was a Canadian based cryptocurrency exchange that closed down in December of 2018 after the death of the founder. The circumstances surrounding the exchange, and the death of the founder Gerald Cotten is largely what has caused a controversy. Mr. Cotten was travelling in India, and starting an orphanage when his untimely death occurred. Gerald had just finished filing his will with his lawyers 8 days previous. Furthermore, Gerald held the only keys to more than $200 million dollars worth of cryptocurrencies.

Bitcoins falling

The Death of Gerald Cotten

The narrative sounds like it is straight out of a movie. A man in control of hundreds of millions of dollars files his will, then dies 8 days later. Gerald died from complications from crohn’s disease while travelling in India. The region of India that Gerald died in is well known for fake death certificates. One reason why the theory of a faked death makes sense is because QuadrigaCX was in significant financial trouble. The legal proceedings are at a point wherein the body of Gerald Cotten may be exhumed. There has been massive amounts of disbelief in the story of his death. The exhumation will clear up whether or not Cotten is truly dead.

The Ponzi Scheme

Recent reports from the Ontario Securities Commission has found that QuadrigaCX was operating as a ponzi scheme during its last year of business. Gerald Cotten was using the deposits from its customers to trade on other exchanges during the 2017 cryptocurrency bubble. After the bubble popped, significant losses were had. Gerald continued to trade in an attempt to recoup the losses. Eventually the user’s requests for withdrawals were difficult to fulfill, as the company didn’t have the cash on hand. The company was taking additional deposits from new customers to pay out withdrawals from other customers. This is the very definition of a ponzi scheme.

A Preventable Situation

The entire scenario that played out was preventable. It was later discovered that the cryptocurrencies deposited into QuadrigaCX wallets were later moved to other exchanges. These transfers in particular are traceable, and would indicate malpractice. Should an educated observer be paying attention, or be looking for this sort of activity, preemptive action could have been taken. There now exists technologies designed specifically for this purpose. CipherTrace is a company that has built a tool to track and catalogue cryptocurrency addresses. Simply by using the traceability properties of blockchain, a lot of information may be gleaned from transaction data.

We have the tools to prevent situations like this from happening again. One of the largest problems the cryptocurrency world is facing right now is scams. In general, educated individuals with malicious intent can take advantage of newcomers. This is a problem that can be solved with education. Government entities such as law enforcement, the security commission, and the CRA could all benefit from knowing how to deal with cryptocurrencies. If we know anything about technology, it is that once something has been invented, it is not going away. Lack of education is what leaves individuals vulnerable to attack. Education and awareness could have prevented QuadrigaCX from running a ponzi scheme.

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About the Author

Keegan Francis

Keegan Francis is a cryptocurrency knowledge expert and consultant. He recognized the opportunity in cryptocurrency early in his career and has been invested in it since 2014. His passion led him to start the Atlantic Blockchain Company which consults on blockchain technology and cryptocurrency know-how.