QuadrigaCX’s cold storage reserves found empty
Efforts to find the funds lost when the exchange’s CEO died have so far been unsuccessful.
When QuadrigaCX’s CEO suddenly died last month, the Canadian crypto exchange’s customers were horrified to learn that the private keys to its cold storage reserves had been lost in the process. In all, around $250 million Canadian dollars worth of crypto was rendered inaccessible, belonging to 115,000 customer accounts.
However, further research has suggested that the crypto was not where it should have been. Blockchain analysis has not yet uncovered the full amount of the missing funds. Bloomberg reports that auditor Ernst & Young have found that five of QuadrigaCX’s six cold wallets have been empty since April 2018.
Exchange cold storage addresses are typically easy to find, since not only are they generally large addresses – the largest bitcoin addresses belong to exchanges – but there is a clear and short transaction trail to them. Customers deposit funds to a unique address, which are then moved almost immediately to a hot or cold wallet, depending on circumstances. Most exchanges keep 2% or less of their reserves in a hot wallet with the rest air-gapped from the web for security reasons.
There have been a number of inconsistencies and puzzles about the QuadrigaCX case, leading to accusations that Gerald Cotten, former CEO of the exchange, faked his own death as part of an exit scam – something Coinbase CEO Brian Armstrong has said seems unlikely. ‘QCX was one of the oldest exchanges in existence (founded in 2013). If they planned an exit scam, it likely would have been timed better…sequence of events suggests this was a mismanagement with later attempt to cover for it.’
Coinbase, Kraken and other exchanges have taken an interest in the QuadrigaCX episode for at least two reasons. Firstly, there are indications that QuadrigaCX was using other exchanges to store its crypto. Secondly, after another nine-figure loss and the attendant reputational hit for crypto, they are at pains to show their customers they are implementing best practice themselves.
Armstrong notes that complaints about withdrawals from the platform, which may have indicated the exchange was running a fractional reserve, escalated back in mid-2018, long before Cotten’s death.