Nearly eighteen months after investors lost an estimated $190M due to the collapse of Canada-based crypto exchange, QuadrigaCX, regulators have uncovered what could be the root of the problem.
Now-defunct QuadrigaCX went offline in early 2019 after news broke that its founder, Gerald Colten had passed away while on India for a honeymoon. Colten, according to reports, was the only one who had access to the private keys to access clients’ cryptocurrencies worth $190 million then, while any efforts to recover the funds have failed to date.
However, following an investigation into the matter, the Ontario Securities Commission (OSC) has concluded that the collapse of the exchange was primarily a result of fraud and a Ponzi scheme run by its late founder, Colten.
The OSC alleged the Colten had committed fraud by opening several false accounts with fake fiat and crypto balances and then used these fictitious amounts to trade with unsuspecting clients using the exchange.
However, when the crypto markets boomed in late 2017, Colten was no longer able to meet up with client withdrawal demands, as he was holding a leveraged short position with around 20,000BTC. He started operating a Ponzi scheme whereby some customer deposits were paid out with that of others to cover the losses.
The OSC claimed to spend the last ten months investigating the matter with the help of key witnesses, international regulatory bodies, and review of trading and blockchain-based transaction data involving the exchange. They thus concluded that “what happened at Quadriga was an old-fashioned fraud wrapped in modern technology.”
Also, the regulator noted that a failure to register the business “facilitated Cotten’s ability to commit a large-scale fraud without detection. So did the absence of internal oversight over Cotten.”
A more substantial portion of the missing funds, $115 million, was reported lost as a result of Cotten’s “fraudulent” trading. A further $28 million was lost when the founder used client assets on three third-party crypto exchanges without authorization or disclosure to clients.
Meanwhile, the OSC will not pursue a lawsuit against QuadrigaCX since the company is bankrupt with a recovered $46 million to be paid out to affected clients by Ernst and Young, the bankruptcy trustee for the company.
Written By W. Michael, Global News Correspondent, Contributor CNIR
