Crypto Update: Auditors Find QuadrigaCX with Empty Cold Wallets

Laura BednarFraud

Investigation Quadrigacx Empty Wallet

Rumors of fraud are spreading throughout the crypto world after Ernst and Young (E&Y) found Quadriga CX’s cold wallets to be completely empty. The Canadian cryptocurrency exchange, QuadrigaCX was on the verge of bankruptcy after their CEO Gerald Cotten died, taking the private keys to the exchange’s wallets with him . They filed for credit protection on February 5 under the Companies’ Creditors Arrangement Act, giving them 30 days to restructure their affairs and attempt to gain access to the wallets to reimburse their clients. What was initially a temporary solution has now become the exchange’s worst nightmare.

Guess What’s Not There

Auditor E&Y was tasked with gaining access to the cold wallets, which are an offline storage system less susceptible to hacking. These wallets were on Cotten’s laptop and after successfully entering into the computer, they found the wallets to be completely empty. They had hoped to find close to $190 million in bitcoin.

They were given the addresses of six possible cold wallets that were central to Cotten’s operations of the exchange. Five of the wallets appeared to have been empty since April 2018 while the sixth wallet was used as a transfer medium to move funds to the exchange’s hot wallet. The sixth wallet also came up empty but wasn’t completely cleared until December 3, 2018, six days before Cotten’s alleged death.

Upon further investigation, E&Y found that QuadrigaCX had 14 accounts on its own platform under a variety of aliases. These accounts had no corresponding customer and were used for trading on the exchange. QuadrigaCX was also found to have accounts on four other exchanges. This led customers to believe that their funds may have been moved to other exchanges completely. These exchanges were under the management of either Cotten or QuadrigaCX. Unfortunately because of the advanced blockchain technology, finding the trail of their funds in new exchanges proves challenging to say the least.

Restitution for the Exchange Users

E&Y identified exchanges where QuadrigaCX funds may have been used, but of the exchanges they questioned, only one responded. Bitcoin magazine reported that the information about the account activity with an outside exchange matched the data provided by QuadrigaCX. The auditor’s report doesn’t state which outside exchange it was, but cryptocurrency researcher James Edwards, strongly believes there is currency in Kraken, Poloniex, Binance, and Bitfinex.

Amid all of the loss and confusion, there is a small window of hope. E&Y has gotten nearly $25 million back in bank drafts that were previously held between one of QuadrigaCX’s payment processors and a monitored bank account. This money along with $245,000 from a Canadian credit union account is making its way to banks to be disbursed among the many exchange users. Finally, the last $5 million in bank drafts relating to customer funds is awaiting approval from QuadrigaCX’s legal counsel to be transferred to a bank account.

Future Steps for the Canadian Exchange

A March 5th court hearing resulted in a 45-day stay on proceedings for QuadrigaCX. During this time, a lawyer from the Grant Thornton company, Peter Wedlake, will act as the company’s Chief Restructuring Officer. This time is meant for recovering the missing crypto assets. The court will reconvene on April 18 while the stay-on will continue through April 23.

SecureForensics is capable of handling all types of fraud, including financial fraud. Our investigators can determine the possibility of a scam and collect court-admissible evidence to protect any of the affected victims. To hear more about your options and start an investigation, call us at 1-800-288-1407.