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Jim Durrell | jad6404@psu.edu | February 5, 2019
Imagine losing a fortune in Bitcoin over the past year, and now you desperately try to salvage what little of your investment you can. However, you find out you can’t withdraw your funds, because the only guy with the password to your Bitcoin wallet has suddenly died.
This is exactly what happened with Quadriga CX, a Canadian crypto exchange start up company based entirely online. The CEO Gerald Cotten suddenly died in early February 2019, holding the only password to the crypto wallets where customers’ coins are stored. Quadriga has been unable to access around $190 million worth of crypto in the wake of his death.
For fear of his crypto exchange being hacked as similar exchanges have previously been, Cotten moved most of the crypto assets into what’s known as cold wallets. A cold wallet is a crypto wallet where coins are stored, however they are held offline on an isolated server. This prevents against remote hacks through the internet since the digital assets can only be accessed directly with a password. In theory, this protects against theft and hackers, but extremely restricts access to these wallets. In Quadriga’s case, Cotten did not share the password with any of his employees, leaving an immense amount of assets unaccessible upon his death. The company has hired encryption experts to crack the password, but crypto wallets are heavily encrypted and it is unlikely they will ever be accessed again.
Customers of Quadriga are furious and have tried to withdraw their funds. However, since Quadriga is unable to access the cold wallet, they cannot repay their customers. Due to liquidity issues arising from this situation, the company has since filed for bankruptcy, and is also facing several lawsuits.
Although this case is terrible for investors and the crypto community, it is important because it reveals how unregulated crypto exchanges remain. To lose $190 million in assets due to the negligence of one individual reveals a lot about how cryptocurrency exchanges require more regulation. Quadriga’s case will likely pave the way for more government regulation with cryptocurrencies, which could make it safer and easier to buy cryptocurrencies in the future, but it also teaches a serious lesson about investing in an unregulated sector. People seeking to buy digital assets should look to well established crypto exchanges like CoinBase that have some government regulation and have a strong history of secure deposits and withdraws, even if it means paying higher fees.
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