The powerful Ontario Securities Commission has been investigating the collapse of Canadian Digital Currency Exchange, QuadrigaCX, since the founder of that exchange, Gerald Cotton, died in India while on honeymoon, supposedly taking with him the password to an encrypted laptop holding the private keys to CAD$200M of digital currency wallets held by the exchange.
The OSC has taken the unusual step of publishing a report into the matter, to firmly dispel any notion that Mr Cotton had faked his own death or that digital currency was trapped in wallets with the private keys lost, but rather that Mr Cotton was running a ponzi scheme up to his death.
Ernst & Young, the independent monitor appointed over the company, investigated the matter and published reports identifying that digital currency wallets did not hold any meaningful amounts.
The OSC report finds that at least CAD$116M of the lost investor funds related to accounts Mr Cotton opened and operated himself on the exchange, leading to losses for the exchange when prices fell. Withdrawal requests were then funded by incoming client deposits, the hallmark of a ponzi operation:
In its final months, Quadriga had almost no assets left and was operating like a revolving door—new client deposits were immediately re-routed to fund other clients’ withdrawals.
The OSC report is scathing over the lack of oversight of Quadriga, but notes:
The misconduct we uncovered in relation to Quadriga is limited to Quadriga and should not be understood as applying to the crypto asset platform industry as a whole. Properly conducted, crypto asset trading is a legitimate and important component of our capital markets.
As the digital currency exchange space continues to evolve, the obligation still rests heavily on users to ensure the exchanges where they are depositing their funds or digital currencies are trustworthy.