Investors locked out after death of QuadrigaCX exchange owner

Canadian cryptocurrency exchange QuadrigaCX is in a tailspin following the apparent death of its owner, 30-year-old Gerry Cotton. Thousands of investors in the exchange have been locked out of more than C$180 million, or approximately US$136 million, since Cotton's demise was reported in December 2018. He left no password to the software wallets containing investors' funds, which he maintained on his laptop computer.

Canada's Nova Scotia Supreme Court granted QuadringaCX an order of creditor protection to stop lawsuits from proceeding against the company while it searches for the lost cryptocurrency. This order was granted amid speculation that Cotton had faked his death in India, despite a death certificate having been produced. Meanwhile, questions about how such an event could occur raised alarm bells internationally about regulatory gaps.

Lack of regulatory oversight

According to Michael Stephens, a partner at Canadian law firm Fasken, the Canadian securities regulatory framework is not always applicable to crypto exchanges, and in the cases where it is, the regulatory oversight does not specifically address business methods such as safekeeping of passwords and wallet recovery.

"Securities regulators could not have prevented QuadrigaCX from apparently being run in a risky manner, with no security measures in place if the wallet passwords went missing," Stephens said. "The next QuadrigaCX-type event is a matter of 'when not 'if' – and securities regulators are relatively powerless to prevent it at this point."

Stephens additionally pointed out that, by analogy, there is also relatively little regulatory oversight of the foreign exchange market.

"It would seem to make sense that any business that is handling transactions involving vast sums of cryptocurrency on behalf of customers, and occupying a fiduciary-type relationship in connection with those sums, should be required to adhere to some codes or standards," he said. "But password recovery measures are really, at this point, just part of 'best practice' in the crypto world rather than part of any legislative imperative."

At this time, Cotton's laptop remains locked, and questions abound about its contents.

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