Canada Crypto Exchange Scandal: the Story of QuadrigaCX

Published: April 21, 2024 | Last Updated: April 25, 2024

Markos Koemtzopoulos

Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

This post summarizes the QuadrigaCX crypto exchange scandal in Canada and its dramatic fall.

The story is notorious because QuadrigaCX CEO Gerald Cotten died under mysterious circumstances on his second day on a trip to India. The exchange turned out to be a Ponzi scheme that relied on the deposits of new customers to fund the withdrawals of old customers. What makes the story even more strange is that the person who stood to benefit the most from Cotten’s death was his newlywed wife, Jennifer Robertson, to whom Cotten had bestowed all his property in a recently written will. 

Canada Crypto Exchange Scandal

Let’s rewind to how it all started. 

The story of QuadrigaCX

Gerald William Cotten was born in May 1988 and died when he was 30 years old in 2018. 

He graduated from York University in Toronto with a Bachelor’s in business administration. 

After graduation, he moved to Vancouver and along with his business partner Michael Patryn started an outfit called Quadriga Fintech Solutions. 

We now know that Quadriga’s co-founder Michael Patryn’s real name is Omar Dhanani. He has been in jail for credit card fraud and has also been involved in other crypto projects such as $TIME Wonderland. 

Why Quadriga?

A quadriga is a chariot that was drawn by four horses and used for chariot racing in Roman times. They named the company Quadriga CX because four people originally controlled the funds that went into and out of this exchange. 

Quadriga CX was the operator of a cryptocurrency exchange that would go on to become the largest crypto exchange in Canada. The main question on many people’s minds is where did the founders get the seed money to start the exchange. 

For the clueless out there a crypto exchange allows you to deposit fiat currency such as Canadian dollars and convert them into crypto coins and tokens. Check out my ranking of the best Canadian crypto exchanges for a list of legit places where you can buy and sell crypto in Canada.

How Quadriga circumvented regulation

The way the Quadriga worked at the time was that they used their own tokens as a means to get around/comply with regulations. 

As a user, you would buy a token issued by Quadriga and then use that token to trade with digital currencies. 

The problem with them taking cash directly and selling Bitcoin is that Quadriga is a money transmitter which requires that they have a license from the Canadian securities regulator. Issuing tokens was a way to get around this.

When money was wired in the money was funneled through a series of shell companies to avoid the scrutiny of regulators.

​How QaudrigaCX became popular

A month after launching QaudrigaCX,  MtGox, the largest crypto exchange at the time imploded losing 850,000 of its customers’ bitcoin. 

This benefitted QuadrigaCX and their traffic skyrocketed as MtGox users started searching for alternative exchanges. Before long they had cornerned about 80% of the Canadian crypto market. 

While QaudrigaCX was hailed as a disrupter and Canada’s largest cryptocurrency exchange it soon became apparent that it failed in many respects. 

  • It didn’t have standard accounting software or a way to track funds. 
  • In addition, if you wanted to cash out you needed to meet them in the parking lot and receive cash. 

Things start to look bad

By 2015 the company was bleeding money.

Patryn put up 150,000 and they raised another 700K from investors after which the company said it was ready to go public. 

However, the company quickly burns through the money they have raised and Cotten starts getting rid of people including their regulatory attorney. Then in 2016 Micheal Patryn also exited and cut ties with Qaudriga and Cotten. 

According to a report by accounting firm, Ernst & Young, it’s at this point that Cotten creates a fake profile, Chris Markay, on the exchange, assigns it a value, and starts buying Bitcoin and Ethereum. 

Effectively he is stealing from client assets to buy bitcoin for his personal accounts.

The Ontario Securities Commission will later find that the majority of trades are Chris Markay trades. 

So here you have Cotten trading against his customers. And not only that but OSC staff discover that he is losing it. He loses $115Mn in trading and spends $24 million on a yacht, a plane, and even his own private island.

​The trip to India and possible exit scam

While this big scam is going on Cotten marries his long-time girlfriend, Jennifer Robertson, and just a month later writes a will leaving all of his assets to her apart from $100K which he leaves to his dogs. 

Gerald Cotten and his wife

They then go on a trip to India where they plan to visit a local orphanage.

They land in Hapur India and check into the Oberoi Raj Villas. 

Cotten who suffers from Crohn’s disease falls ill and officially dies the next day. 

His cause of death is listed as cardiac arrest but the story gets weirder in that they are two death certificates. The first death certificate lists the hotel as his place of death whereas the second one lists a nearby hospital. 

Did Cotten really die?

Many believe that Mr. Cotten faked his own death and that the whole thing was staged for an exit scam. 

Crohn’s disease is associated with Irritable Bowel Syndrome and can be quite uncomfortable. However, dying from Crohn’s disease is very rare. 

What makes the story suspicious is that a doctor at the hospital refused to sign an embalming certificate. 

Cotten’s body was then taken to the SMS Medical College where the supervisor never saw the body and the embalming certificate was signed by a junior staffer. 

Moreover, there are 2 separate death certificates with different locations listed as the location of death.

Two days later Cotten’s widow departs with her husband’s body. 

His remains were buried in a closed casket service in Canada and a month later she announced her husband’s death to the world. 

Quadriga’s collapse

At around this time, people were not able to withdraw their money or crypto asset balances.

The company had ceased operations but people were still able to put money in. 

On January 31st, 2019 Quadriga announced bankruptcy. 

Cotten had taken his passwords and recovery key to his crypto assets to his grave. While his wife still had Cotten’s laptop she claimed in court that she did not have the passwords and private keys to access the cold storage system. 

There was also no dead man’s switch to come into effect after he passed away. A dead man switch is when you have a system in place to reveal the password in the event of your unexpected death. 

Several cold wallets wonder by Quadriga had been emptied a few months before the bankruptcy. This happened around the time one of Qaudriga’s main processors’ crypto capital had also gone bankrupt.

A quick word about wallets

Cold storage means that your crypto assets are not connected to the internet which makes it much harder for attackers to hack into. You could even use the hard drive of a laptop computer as a cold wallet. Digital wallets on the other hand are apps and software that you download on your desktop or mobile device and are connected to the internet. While pretty robust you would not want to store your life savings in such a wallet. 

How much crypto went missing?

The total amount missing was

  • 25K BTC
  • 11K BCH
  • 11K BSV
  • 430K ETH
  • 35K Bitcoin Gold

That adds up to more than 1Bn dollars. 

What about Michael Patryn

Patryn’s original name is Omar Chanani. He worked with an identity theft ring known as the Shadow Crew. According to Amy Castor and Reddit user QCxint Cotten and Patryn had worked on investment scams before starting at the age of 15.  

Michael Patryn
Source: Medium.com

Patryn helped others with money laundering by mixing their money into a program called e-gold. Then you would be able to get your money out for a fee and it would be clean.

Dhanani was deported as a result of his conviction for identity fraud and theft. 

Shortly after he and Cotten teamed up for an operation using the Midas Gold Exchange. This was a digital assets exchange before crypto was a thing that allowed you to buy tokens called Liberty Reserve tokens without needing to verify your personal information. It eventually got shut down by law enforcement. 

That same year Cotten and Patryn founded Quadriga.

Could Cotten still be alive?

Patryn and Cotten used to chat on various forums. Cotten’s username was Murdoch1337. Months after Cotten’s death Murdoch1337 was active on those forums so many people will point to that as him being still alive. 

As far as the officials are concerned the case of Cotten’s death is closed and any requests to check Cotten’s body have been denied. However a lot of people who lost money after the collapse of Quadriga are convinced that there is more to this story. 

FAQs

What Canadian crypto exchange went bust?

​The most notorious case is that of QuadrigaCX which filed for bankruptcy in 2019. 

Are crypto exchanges legal in Canada?

Yes, Crypto exchanges are allowed to operate in Canada if they are registered with FINTRAC as a Money Services Business. You can check if they claim to have one by scrolling to the bottom of their page where they list their registration number. 

Why Binance is banned in Canada?

According to Canadian law enforcement Binance embezzled customer funds and is not allowed to operate. Binance’s CEO CZ is doing time in the US for similar allegations. However, Binance continues to operate unhindered in my other countries including the US. 

Which is the best crypto exchange in Canada?

Coinbase and Kraken have the best reputation for security while if it’s the range of coins you care about you should be looking at KuCoin. Check out my review of the top Canadian crypto exchanges here.

Is crypto taxable in Canada?

Yes, you need to pay capital gains tax on your crypto earnings in Canada. See how to calculate your crypto gains here.

Is Coinbase legal in Canada?

Yes, Coinbase is registered as a Restricted Dealer by the Canadian Securities Administrators (CSA)

How can I buy crypto in Canada?

The easiest way to buy crypto in Canada is to sign up for a crypto exchange. You will need to verify your identity and deposit funds from your bank account after which you will be able to purchase crypto. 

References

  1. Research by Nathaniel Rich
  2. Netflix documentary The Hunt for the Crypto King 
  3. Vanity Fair article on Cotten
  4. Amy Castor’s investigative deep dive
  5. Ontario Securities Exchange Commission report
  6. Exit scam podcast
  7. Death in Cryptoland by CBC
  8. iHeart Podcasts, Stuff They Don’t Want You To Know: Crypto, Crime, and Conspiracy: The Death of Gerald Cotten.
Markos Koemtzopoulos is the founder and main writer of ElementalCrypto. He has been a lecturer at the University of Nicosia on cryptocurrencies and DeFi and has taught two courses on crypto and blockchain technology.

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