‘We are in the early stages of a long process’ – TheChronicleHerald.ca

Those of us accustomed to rooting through grimy car cupholders with caffeine-starved fingers for a toonie at the Timmies drive-thru should be forgiven for our skepticism that $180 million worth of something could be lost in the locked laptop of a 30-year-old who suffered a tragic end.

Because beyond its metallurgy that government issued coin that would get you, a coffee is little different than the first pure gold coins stamped with the emblem of an ox and a lion 2,700 years ago by Lydian king Alyattes in what is now Turkey.

The latter is one of the first known currencies minted by a government.

Those traded through Gerald Cotten’s exchange, Quadriga, are new in that they aren’t.

Cryptocurrencies are a decentralized form of money traded online.

And over the coming years they could drastically alter how we trade our time for the goods, including that cup of coffee, and services offered by others.

But there’s nothing virtual about the Nova Scotia Supreme Court, where lawyers representing some of the 115,000 people court documents say Cotten’s company, QuadrigaCX, owe an estimated $250 million worth of virtual currency and cash will line up later this week.

There’s also a growing body of research warning that the so-called wallets held on Cotten’s encrypted laptop may be largely empty.

“As I’m looking at I’m hoping that I will click something and up will pop a huge pile of Ether. But with the amount of research I have done and others have done, it seems really unlikely that at this point we’re going to find it,” said Taylor Monahan, founder and chief executive officer of online currency exchange MyCrypto.

The Ether she’s talking about isn’t a cosmic juice the ancients believed filled the space between heavenly bodies, it’s Ethereum — a virtual cryptocurrency that on Sunday was trading for just over C$155.

According to court filings, QuadrigaCX is supposed to have 429,966 units of Ethereum. The keys to the supposed accounts holding that currency are, according to court filings under QuadrigaCX’s creditor protection process, held on Cotten’s laptop.

He’s dead and no-one else apparently has the password.

Monahan said she has found evidence the company only had between 2,000 and 10,000 Ether in its wallets.

Blockchain analyzing company Elementus has done similar research in the wake of Cotten’s Dec. 9 death in India from complications of Crohn’s disease while he was allegedly helping build an orphanage and come to a similar conclusion: QuadrigaCX doesn’t have large offline reserves of Ether in what are known as cold wallets.

To understand any of this, including how Monahan or Elementus could track what QuadrigaCX was moving in and out of accounts, requires some background in a wild west of virtual currency where a growing chorus is calling for regulation.

Cryptocurrencies like Bitcoin, Ethereum and Litecoin are created through a process called mining. Banks of computers owned by whoever wants to set them up solve incredibly complex mathematical puzzles.

These banks of computers are all nodes in what’s called the blockchain.

When a problem is solved, a block (unit of cryptocurrency) is added to the ledger shared simultaneously by all these nodes, which also verify the math behind the solving or mining of the block.

This ledger holds the history of every block — which account traded to which account and when.

As well the contents of each account, known as a wallet, are listed on the ledger.

Anonymity is achieved through not having names on the accounts. They are each a unique mixture of letters and numbers to which the owner has a password.

“For myself as an individual, it would be very hard for someone to figure out my address (wallet),” said Monahan.

“However, when you are a big exchange you are interacting with thousands or hundreds of thousands of accounts on a daily basis and you may make public statements or write blogs, so your addresses are sort of revealed over time.”

QuadrigaCX is a pretty large exchange.

Founded in 2013 by Cotten, it’s a user friendly website that allowed people to buy these blocks of cryptocurrency with traditional currencies, trade them for other cryptocurrencies or sell them.

QuadrigaCX made money by charging a fee to both the buyer and the seller on each transaction.

“So in theory Quadriga could never have a problem with liquidity because it’s not using its own money to place or fill orders, it’s just matching users on its site,” said Monahan.

Exchanges like QuadrigaCX hold all its clients’ cryptocurrency in two kinds of accounts — hot wallets, which are connected to the internet to allow for quick exchanges, and cold wallets that are kept offline to protect them from hackers.

“Quadriga keeps only a minimal amount of coins on the server (in a hot wallet),” reads an affidavit filed with Nova Scotia Supreme Court by Cotten’s widow, Jennifer Robertson, on Jan. 31.

“The normal procedure was that Gerry would move the majority of the coins to cold storage as a way to protect the coins from hacking or other virtual theft.”

According to the document, the keys to the cold wallets were held on Cotten’s laptop.

Roberston’s affidavit states those wallets hold 26,488.6 Bitcoin, 11,378.8 Bitcoin Cash, 11,149.74 Bitcoin Cash SV, 35,230.43 Bitcoin Gold, 199,888.4 Litecoin and 429,966 Ethereum. The estimated value of all these units of cryptocurrency at the trading prices of Dec. 17 was about $180 million. The company had a further $70 million worth of Canadian currency belonging to its clients.

What Monahan and analysts like Elementus did was seek to verify these amounts by tracking down the wallets belonging to QuadrigaCX and verifying their holdings on the aforementioned ledger known as the blockchain.

Some analysts encouraged people who were clients of QuadrigaCX’s to post the account codes contained in the receipts they received for their trades.

Monahan started with an error that popped up about a year ago in the Ethereum blockchain that resulted in a public statement from its creators. QuadrigaCX also issued a statement at the time that contained some of its account numbers.

From that, Monahan followed transactions on the blockchain, looking at the balance of each account as she went.

She found no sign of accounts, or cold wallets, containing the large amount of Ethereum claimed in the court documents.

But she did find something else.

“When we look at the accounts, the amount of money they are sending to external exchanges, even if you take into account their fees, is usually like all of their money,” said Monahan.

“Which indicates they were moving customer funds to other exchanges for some reason.”

Which raises the question, why was QuadrigaCX, itself an exchange, sending its customers money to other exchanges, rather than keeping it in offline cold wallets as stated in the court records?

There is the possibility, which Monahan acknowledges, that there are still undiscovered accounts belonging to QuadrigaCX holding large sums of Ethereum.

And in Roberson’s affidavit she says an expert in cryptology has been hired to try to crack the codes to Cotten’s laptop, find and get access to the accounts so that everyone’s money can be released.

“I was not involved in the business of the companies while Gerry was alive,” reads her affidavit.

“Gerry would, however, talk about the business from time to time in the normal course of our lives together. Gerry ran the business through his laptop, mostly at our home, but also wherever he happened to be. Since he has passed away, I have learned significantly more about the companies.”

Beyond how it was trading currencies, there are also questions about how QuadrigaCX was storing them.

Usually, large exchanges keep their cold storage offline in a safe place on a series of computers that aren’t connected. Toronto based lawyer and blockchain expert Addison Cameron-Huff, who has consulted with these exchanges, explained that each of those computers can be set to purge its memory after the wrong passcode is entered a certain amount of times.

“I believe that Gerald Cotten was familiar with best practices regarding storage of cryptocurrency — he was not a novice,” Cameron-Huff told The Chronicle Herald.

“… I would be surprised if the answer in the end turns out to be that only one person had access, which is what’s being reported in the news, since that’s not in line with best practices, or practices that I’ve helped to set up for large amounts of cryptocurrency.”

The full story is what he and the lawyers representing QuadrigaCX’s clients are hoping to find out as the court process plays out. As of now, the company has been placed under creditor protection and Ernst & Young Inc. appointed as monitor.

“We are sure you have many questions,” reads a Feb. 5 statement placed by QuadrigaCX on its website.

“We are in the early stages of a long process and we do not have all the answers right now …”

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