Last December, Gerald Cotten, a Canadian entrepreneur who parlayed last year’s cryptocurrency frenzy into a personal fortune as the co-founder and CEO of QuadrigaCX, was in rural India to help open an orphanage he was funding. At 9:45 p.m. on December 8, Cotten arrived at Fortis Escorts hospital in a state of septic shock, according to the hospital report. The patient had a history of Crohn’s disease but at age 30, given his health, traveling in remote India may not have been prudent. But twenty- four hours and two cardiac arrests later, he was announced dead.
The death of Cotten, the sole key holder to the crypto assets on the exchange also meant that $190 million worth of crypto assets are no longer accessible.
Crypto currencies have long been praised for their lack of regulation and government interference. But as the Quadriga saga continues to unfold, the international crypto investment world has raised a seemingly obvious but overlooked question: Who should be held accountable, and what is there to protect investors when faced with an unplanned loss of keys, whether to an exchange or a hot wallet.
“My personal feeling is that regulations imposed by Securities Administrators are there for a reason. There is so much evidence of wash trading and other foul play,” said Andrew Wallace, a former QuadrigaCX user based in Vancouver, Canada.
Andrew Wallace is usually smartly dressed, what you would expect of an ambitious and educated young man. A Vancouver native in his late twenties, he said that the QuadrigaCX scandal really took him and his friends by surprise.
“It was a painful lesson for some of my friends who invested; many have just accepted that there’s no way of getting that money back,” added Wallace.
Following Mr. Cotten’s death, Christine Dunhaime, QuadrigaCX’s former regulatory attorney, wrote a letter published on Coin Desk this past March. She described the “path of lawlessness” the company undertook and her confusion about where the money has gone. But she ended the letter with “I didn’t want to write this article but I did it because customer assets held by exchanges must be subject to greater regulation and oversight.” Her statement is seemingly at odds with the original objective and existence of bitcoin – deregulation and decentralization.
Mr. Wallace said he and his friends chose QuadrigaCX, one of the largest Canadian crypto exchanges before its “debunk,” because of its sleek and organized interface.
“It had a professional aura to it,” said Mr. Wallace. It was also one of the few that abled Canadian investors to directly transfer Canadian dollars to the platform. Mr. Wallace said the website reminded him of sophisticated trading platforms, similar to the TD Bank one he used for his investments in stocks and funds.
Mr. Wallace got into the crypto investment in the end of 2017 and sold all his Ethereum coins and moved lesser-known coins worth no more than 100 Canadian Dollars at that time to a ledger cold wallet by mid-2018. Although he said he sold during the “bull run at CAD 1000 per coin” and made some “easy money,” he was beginning to feel “more uneasy and liquidated it all.”
“I am a bit ashamed of how easily I jumped on the bandwagon then without doing research as much as I would have with ETFs or mutual funds.” Mr. Wallace heard about QuardrigaCX through friends and “they were taken as gospel.” After his initial CAD 8000 investment, he began to do more research about the crypto space and that is when he realized that he actually had “no legal claim over the money, and was trusting an intermediary completely.”
That’s also when most of his friends, who are mostly college-educated millennials with “some disposable income,” got out. “Half of them sold fully, the others also kind of all started withdrawing,” said Wallace.
His decision to cold exit from crypto investment was driven by a few factors.
“People were starting to realize that hey, maybe it wasn’t as safe and secure as they had expected.” And they were beginning to get “spooked out” by the “pretty loud bearers in the crypto space.” Finally, in November 2017, when he heard that Tether was hacked, netting the hacker $31 million worth of the world’s most well-known stablecoin issued by Tether, which pegged to the USD at a 1:1 exchange, he realized it was just all too risky.
But for die-hard crypto investors, the series of hacks, scandals and the death of QuadrigaCX’s CEO didn’t seem to deter them away from continuing to put money down.
Regulated or not, for most avid investors, the potential of cryptocurrency is far from being fulfilled. Alberto De Luigi, an IT project manager and software architect from Milan, has been “fully invested” in bitcoins since 2015, which he explained as keeping the majority of his assets in bitcoins rather than fiat currencies such as the euro or dollar.
“Quadriga is the first and hopefully the last time something like this happens to an exchange,” said Mr. De Luigi.
He added, “I exchange everything that I do not spend during the month, and during a ‘bull-run’ I often send my entire salary to the exchange on the same day as I receive it.”
According to Clavestone, and institutional-grade bitcoin key management platform, the annual change of bitcoin from 2015 to 2019 was 37%, 123%, 1289%, -72% and 27%. And based on the calculations from DQYDJ, a bitcoin return tracking website, the total return from January 1 2015 to January 1 2019 would be 1138%, an annualized return of 187%. This means even with just $100 worth of bitcoin in 2015, Mr. De Luigi theoretically could have $18,700 worth of bitcoins today. If it were true (unverified due to security reasons) then this may justify the risk.
“One of the fundamental characteristics of bitcoin that makes it attractive is that it cannot be confiscated. It is unique because people don’t have something like this that just can’t be taken away from them,” said Rafael Yakobi, an attorney at The Crypto Lawyers LLP in San Diego.
However, other investors are no longer too bullish on cryptocurrency. Ishan Anand, an American hobbyist investor based in Beijing, has been observing the cryptocurrency space since 2013.
“Libertarians want to control their own money, and the government can’t touch it. And now something like this happens, they (bitcoin investors) come crying back and now that things are falling apart they’re like someone help me,” said Mr. Anand, who has gotten out of the market and continues to observe it from a distance with excitement for the blockchain technology but skepticism for the theory of demonetization.
Although Mr. Anand sees the potential utility of the blockchain technology, he doesn’t think bitcoin will become mainstream.
“If you look at the space right now, you can get hacked and money just vaporizes easily,” said Anand, and “I just don’t see how bitcoin will make everyone’s life easier.”
In response to their concerns, The Canadian Securities Administrators (CSA) and Investment Industry Regulatory Organization of Canada jointly published a framework for crypto-asset trading platforms in mid-March, following Gerald Cotten’s death.
“This consultation outlines a proposed regulatory framework that provides clarity for platforms, greater market integrity and protection for investors,” Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers said in the press release.
Another source of reassurance is Saifedean Ammous, economics professor at the Lebanese American University and the author of The Bitcoin Standard, who said that the advantages of having bitcoin over fiat money are twofold: bitcoin is immune to unexpected inflation and it cannot be censored. This concept is widely known by even non-investors now, but Professor Ammous added people must not confuse a crucial factor.
“Having bitcoin on an exchange does not mean you have bitcoin in any technical or legal sense,” Professor Ammous said. “If you have bitcoin at an exchange,” he added, you are technically only a speculator of the value of bitcoin. Without a private key, “you do not own bitcoin, you’ve lent dollars to an entity that promises to redeem it in the form of a certain number of bitcoins at a certain point in time.”
Moreover, he said it is possible to buy, earn and use bitcoin without ever using an exchange, or only be “exposed to the risk of an exchange hack or theft for a few minutes after they receive your wire transfer and before you use it to purchase bitcoin and send it to the address you control.” This all can fundamentally diminish the risk an investor is exposed to.
Amidst all the frenzy, Mr. De Luigi seems to think that the paranoia of theft is not the real issue.
“I think there are more people losing bitcoins and crypto because they are losing the keys to their own wallets than people losing bitcoin because of theft or hacking,” said Mr. De Luigi.
And what if a private investor dies? According to Neil Woodfine, Marketing Director at Blockstream, a Canadian company dedicated to building Bitcoin infrastructure, there are no established formal inheritance solutions to bitcoins yet.
For professionals like him, investing is only part of his passion. The other part is educating others about bitcoins so investors can be more sophisticated.
“There are two rules of bitcoins: number one always talk about bitcoin, number two, never talk about your bitcoin,” said Mr. Woodfine.
And that is probably why not even a single person replied to my #QuadrigaCX interview requests on Twitter, Reddit, Bitcoin forums and Facebook groups.
So why do investors continue to invest and how can they plan for emergency situations?
Mr. Woodfine patiently walked me through each step of buying, storing and protecting bitcoins. To hardcore bitcoin believers like Mr. Woodfine, “most long-term bitcoiners hold with the intention of spending bitcoin on goods and services in the future when it is fully monetized.” That is, when the fixed amount of 21 million bitcoins are all mined and fiat money becomes “irrelevant.”
Even with such high risks, Woodfine argues that “bitcoin significantly shifts control in favor of the individual, making it much easier and safer for non-compliance.”
To start with, investors can distribute what is called multi-sig keys which stands for multiple signature keys to family members. Bitcoiners first thought of this protective measure by cutting up their seed and giving different parts of the key to different family members. Now, companies like Clavestone, Winklevoss IP and even the most widely used exchange platform, Coinbase, provide storage options and multi-sig keys.
In the face of an unfortunate event, if the multi-sig key has four parts, having three of them will allow access to the wallet, and this seems to be the most tech-savvy way for investors to plan for the future.
Crypto inheritance expert Pamela Morgan, author of Cryptoasset Inheritance Planning: A Simple Guide for Owners said, “Bitcoin is not unregulated, it is regulated by math.” She describes the technology as a global peer-to peer cash that is not only a global finance phenomenon but also a political one.
There are two kinds of keys, a custodial key, where “you don’t have the keys; you have an account,” so if your coins are stored on a platform, in this case called a hot wallet, then under different state laws, your heirs are entitled to your cryptoassets just like any other assets. If you have a non-custodial key, the individual is in sole control of the key. It is not connected to the internet, thus often referred to as a cold wallet, usually in the form of a small flash drive. Then it is less hackable, but the downfall is if you lose your 24-word key, you lose access to your cryptoassets forever.
Meanwhile back in Canada, Jennifer KM Robertson, widow of the recently deceased Gerald Cotten, declined my interview request. And any direct contact information to QuadrigaCX has been taken down from the website. Instead a formal message addressing the “liquidity issues” they are facing, explains that they have not been successful in locating their “significant cryptocurrency reserves held in cold wallets.”
Whether it is the CEO of an exchange or a hobbyist investor of bitcoin, “without the keys, it is gone,” said Ms. Morgan. And there seems to be no solution, other than pre-emptive planning.
What’s worse is “you cannot remove the bitcoins from the blockchain. The bitcoin doesn’t disappear, they sit on the network and taunt you,” said Ms. Morgan.
However, Professor Ammous reiterated that “the problem of computer and online security is real for everyone, and bitcoin is just one new manifestation of this problem.” He added that just like physical cash, “the fact that a form of money can be stolen is a feature, not a bug.”
And optimistic investor Alberto De Luigi believes he has done the due diligence needed to protect his assets. If bitcoin can really keep up this momentum, with the preface of no government interference, no unexpected disastrous events and proper protection of his asset, he believes he’ll be okay. Any university tuition fee his two-year-old child might need in the future may seem miniscule compared to the potential gain from this investment.
“I am not the only one to know the seed; I have also left something written somewhere my loved ones know how to retrieve. A multi-signature key is not necessary in my situation right now but actually the person/people who knows the key could steal my bitcoin from me, if willing to do so,” he said.
As for Mr. Wallace, he has moved all his investments into what he calls “traditional brick and mortar financial institutions.” Looking back at his early exit out of QuardigaCX, he said, “I was lucky. Lucky to learn a lesson and come out with a few thousand bucks.”
– This article was written by Grace Shao
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