More than $400,000 in QuadrigaCX cryptocurrency disappears into 'cold wallet'

The court-appointed monitor overseeing the search for the $260 million owed to clients of the QuadrigaCX cryptocurrency exchange says it recently found more than $900,000 in digital assets — only to see more than half of it escape its grasp.

The bizarre turn of events was revealed Tuesday in the first court report from Ernst and Young, which was appointed as monitor on Feb. 5, when the Nova Scotia Supreme Court granted the insolvent company protection from its creditors.

The report says Ernst and Young learned last week that QuadrigaCX was holding $902,743 in bitcoin, litecoin and ether cryptocurrencies in so-called hot wallets — but something went wrong on Feb. 6.

The monitor's report says QuadrigaCX "inadvertently" transferred 103 bitcoins valued at $468,675 to what are known as cold wallets, which the company is now unable to access.

Cold wallets are offline storage devices protected by encryption technology. Cryptocurrency exchanges typically use them to store the bulk of their digital assets, which puts them beyond the reach of online hackers.

Hot wallets are online sites that store smaller amounts of cryptocurrencies, making them readily available for trading.

"The monitor is working with management to retrieve this cryptocurrency from the various cold wallets, if possible," the report says. "The monitor has made arrangements to transfer the remaining cryptocurrency into a cold wallet which will be retained by the monitor."

About 115,000 QuadrigaCX customers are owed about $70 million in cash and $190 million in bitcoin and other cryptocurrencies.

The Vancouver-based exchange was shut down Jan. 28, more than a month after its CEO and sole director — Nova Scotia resident Gerald Cotten — died while travelling in India, leaving his company without access to much of its cryptocurrency.

His widow, Jennifer Robertson, has said in court documents that Cotten was the only person with access to his laptop, which is thought to contain the digital keys to the cold wallets.

Speculation about company

The latest twist in the QuadrigaCX case is sure to feed rampant online speculation about the company's dealings. Court documents have pointed to persistent rumours about Cotten's death and threats aimed at his widow, who lived with Cotten just outside of Halifax.

Aside from the cold wallet snafu, Ernst and Young also reported that there is more than one laptop at the centre of the case.

Electronic devices recently retrieved from an encryption expert working for QuadrigaCX include two active laptops; two older model laptops; two active cellphones; two dead cellphones; and three encrypted USB flash drives.

As well, steps have been taken to retrieve Cotten's desktop computer from his home office in Fall River, N.S.

"The applicants (QuadrigaCX) and the monitor will continue with their efforts to access Mr. Cotten's devices, find and access any QuadrigaCX cold wallets that exist, and locate any other cryptocurrency belonging to Quadriga and report back to the court in respect of these activities."

Much of the $70 million in real money owed to creditors is in the form of bank drafts, which the company has failed to deposit in a financial institution because regular banks remain leery of dealing with unregulated cryptocurrency businesses.

Nine third-party payment processors that worked with Quadriga have been told that any funds belonging to the company, including bank drafts, must be delivered to the monitor.

According to Robertson, one of those processors has five bank drafts worth $25.2 million.

However, Ernst and Young confirmed it has yet to receive any funds from those businesses.

"It may be necessary for the applicants (QuadrigaCX) and monitor to return to the court for additional assistance in ... securing the return of funds from third party payment processors," the report says.

"The applicants and monitor are working with the issuing banks ... to determine the necessary documentation and/or endorsements required to facilitate the transfer and negotiation of the bank drafts for deposit into the disbursement account."

User identities to remain secret

Ernst and Young also confirmed that it is working with the company to preserve data stored on a series of third-party servers, though it remains unclear where those servers are located.

The findings in the report are based on unaudited financial information, including QuadrigaCX's records and other financial information, and interviews with its directors, senior management team, consultants and legal advisers.

While a list of creditors has been compiled, it won't be made public. Nova Scotia Supreme Court Justice Michael Wood, in his initial order on Feb. 5, said the identities of the users would remain secret because those who trade cryptocurrencies typically remain anonymous.

More than 500 affected users have contacted Ernst and Young since the insolvency process began.

Meanwhile, QuadrigaCX is being kept afloat by Robertson, who has contributed $150,000 to cover operating costs.

Documents filed with the court last month, including an affidavit from Robertson, state that QuadrigaCX users were owed $180 million in cryptocurrency, but Ernst and Young says that figure is actually $190 million.