What does a cryptocurrency exchange do, and why would they have hundreds of millions of dollars of other people’s money under their absolute control? I thought that if you owned cryptocurrency, you had it in your own wallet. How is it that an exchange is holding that much of other other people’s crypto? I thought exchanges just did instantaneous conversions between crypto and hard currency.
Chronos seems to be asking the same question I am, so I will defer to the other thread, even though that is not the point of the thread and nesta seems to be on track with an answer to it.
Stock certificates are not made out of paper anymore, but whether paper or electronic your stocks are probably under control of your stockbroker. This is very convenient — press a few buttons and you’ve bought or sold shares. No need to send paper certificates (or special electronic credentials) back and forth.
The Bitcoin exchanges are performing a similar service as that of stock brokers. One difference is that stockbrokers are heavily regulated and require government licenses. The Bitcoin exchange OTOH is some kid with a computer and modem in his garage who suddenly found that people had answered his text ad and sent him thousands of Bitcoins.
The exchanges converting crypto to other currency and back is one function, but they also function like stock markets. Not only does moving your crypto into your own wallet make it harder to do that, but it’s also the normal cloud storage conundrum. When you put all of your family photos on iCloud, you’re putting a lot of faith that Apple is going to respect your privacy and also do a good job of maintaining your pictures for you, including backups. If you don’t trust Apple to do that then you can keep all of your pictures on a hard drive in your house, but then making sure they stay safe is up to you. A lot of people have lost a lot of money when their offline wallets get corrupted, lost, or stolen, so people choose to put their faith in online wallets on these exchanges instead. It’s a tradeoff.
The hearing in this case will be today in the Nova Scotia Supreme Court. The company that ran the exchange is seeking court protection while it seeks to straighten out the mess.
And the court appears to have granted a stay of all civil actions to give the companies more time to try to access the computer.
From the wife’s affidavit it looks like there are three interlocking business corps, all incorporated under BC law. There were a large number of shareholders, but her husband was the only officer and director. He was also the only one with the ability to transfer from the cold wallet to the hot wallet.
He didn’t have an office, place of business or any employees. As someone said in the other thread, this was like Grandpa setting up a bank in his garden shed.
In her affidavit, she stated that her husband was very conscious of security and mentions all his encryption of his devices. That’s “security conscious” at a very low-definition, of “not
letting anyone use my computer”.
It’s doesn’t meet the test for “security conscious” when you’re looking after millions of dollars of other people’s assets. Quite the reverse. By having only one person with the power to access the assets, he was endangering the security of all those assets. Even assuming good faith, there needs to be decentralized decision-making and asset control to protect the depositors’ assets. You’ve got to have the “hit by a bus” contingency in mind when you’re looking after other people’s assets.
And that’s assuming good faith. If you were trying to come up with a way to set up the [del]marks[/del] clients to get all their millions, this could easily be the way to do it: have them turn their assets over to him, give him sole control, and then have him go off to India to set up an orphanage where he tragically dies …
I wonder why that article says he was holding 70 million in cash and 180 million in bitcoins. That part doesn’t make much sense, or maybe I just don’t understand how those exchanges work. Shouldn’t it have said he was holding 250 million in bitcoins?
Apparently he was also taking cash deposits through third party deposit systems. Some clients would send him cash to buy bitcoin, or would want to sell bitcoin and get cash, so as near as I can tell he was also dealing in large amounts of fiat currency.
That was when the trouble started about a year ago: he couldn’t get a business bank account, I gather because the banks didn’t know where all the money was coming from or going to. That likely triggered concerns for them under their obligations.
So instead, he was relying on a third party money transfer system. About a year ago, the bank that the third party was dealing with froze the account because of money-tracing issues.
That went to court in Ontario and eventually resulted in a judgment where the bank unfroze the account on condition that the third party then pay the money into court. The court then issued money orders for approximately $25,000,000, but no-one will accept them because it’s not clear where the money came from.
Reading between the lines, I assume that means the banks are worried about running afoul of money-laundering laws.
In the articles I’ve read, the lawyers mentioned those money orders as one asset that could be available to the creditors, if the provenance issue can be clarified.
There’s been a few articles saying that Canadian banks aren’t “crypto-friendly”, like this one, critical of CIBC for freezing $25 million last year because it wasn’t sure who owned the deposits: “Banks Hate Crypto in Canada: QuadrigaCX Exchange sees $28M frozen”.
In her affidavit, the widow stated that Gerry had not been able to open any business accounts with the banks, so had to rely on third-party processors.
I have some sympathy for the banks:
Bitcoin guy: “I’d like to open a business account please.”
Stodgy Banker: “Sure. How big a business are you looking at?”
Bitcoin Guy: “I’ve got several million under my control right now.”
Stodgy Banker: “Wow! So you must have several employees, accountants, and a well-established audit system?”
Bitcoin Guy: “Well, no, actually. I’ve got a good website and my business is really just me and my laptop.”
Stodgy Banker: “??? What’s your business plan??”
Bitcoin Guy: "I take in large cash deposits from people who are reluctant to disclose their identities, convert it into anonymous bitcoin, and then eventually sell it for them and pay them by wire transfers. They prefer to use anonymous addresses whenever possible. "
Stodgy Banker: “All of that may pose a problem, because we’re required by law to keep track of who deposits large sums of money. We also need to be assured that our customers who take deposits for others do their due diligence so they know who is owed the money.”
Bitcoin Guy: “You guys are trying to shut me down! You hate crypto!!!”
you cant tell me that for 10 grand or so they cant find someone to crack it ………I used ot know people whod try to do stuff like this just for fun on a boring Tuesday
The Widow Cotten says in her affidavit that they’ve hired a retired Inspector from the Mounties who specialized in IT and computer crimes, and he’s not been able to get in.
The laptop is currently in Mountie custody, and the Court has appointed Ernst&Young as the trustee. I assume a lot of crypto resources are being put into it.