[Coin Crime] The Sudden Death of a Successful Exchange CEO... The Shocking Truth Revealed

[By Yang Won-mo, Block Media] December 9, 2018. A man died in a hospital in Jaipur, India. He was 30 years old. His name was Gerald Cotten, the CEO of Canada’s largest digital asset exchange, QuadrigaCX, who suddenly passed away due to complications from Crohn's disease while on his honeymoon with his wife.

Following Cotten's death, tens of thousands of investors were left in shock. It was not because of his death itself, but because the exchange he operated declared 'inability to pay' shortly thereafter regarding customer assets. According to the exchange, Cotten was essentially the sole manager of the digital wallet where customer assets were stored. However, with Cotten's death, access to that wallet was also lost, as explained by the exchange.

But unexpected facts emerged during the investigation. The digital wallet, which was supposed to hold customer assets, had been virtually empty for months prior to Cotten's death. This was the moment when a simple password loss incident transformed into a massive financial fraud.

A Password Known Only to the CEO... But the Wallet Was Empty

The exchange announced Cotten's death to the world on January 14, 2019. A month later, on February 5, the exchange suspended operations and applied for creditor protection in court. Cotten's wife, Jennifer Robertson, stated in a court filing that "the laptop her husband used is encrypted, and she does not know the password or recovery key." At that time, the exchange explained that most customer assets were stored in a 'cold wallet' that was disconnected from the internet.

However, the investigation results from Ernst & Young (EY), appointed by the court, told a different story. According to a report released in March 2019, five of the six Bitcoin cold wallets previously used by QuadrigaCX had been nearly empty since April 2018. The remaining one was used for trading Bitcoin with other exchanges but had no balance at the time of the investigation.

EY also confirmed that some assets had been moved to external exchange accounts. This meant that even if the password were recovered, there would not be enough assets to return to customers. Consequently, some investors raised suspicions that "Cotten faked his death and went into hiding."

Inputting 100 Million Canadian Dollars into Fake Accounts... Ponzi Scheme Revealed

The true nature of the incident became clearer through a report from the Ontario Securities Commission (OSC) in June 2020. The OSC investigation team concluded that the cause of QuadrigaCX's collapse was "Cotten's fraudulent activities."

According to the investigation, Cotten created several pseudonymous accounts within the exchange, including one named Chris Markay. He manipulated account balances to show large amounts of cash or digital assets deposited, even though there were no actual deposits. The 'fake assets' created in this way were used in transactions with real customers. Cotten bought customers' Bitcoins with non-existent money or sold digital assets he did not hold to secure cash.

The scale was significant. In 2017, Cotten once input a fake deposit of 100 million Canadian dollars (approximately 9.45 billion won) into the Chris Markay account. Transactions conducted from that account from 2015 to 2018 exceeded 250,000.

The problem arose as trading losses accumulated. As market prices moved contrary to expectations, massive losses occurred, and there were insufficient actual assets to cover them. Cotten then used deposits from other customers to cover losses and process withdrawal requests. This was a 'Ponzi scheme' structure, where funds from new customers were used to pay existing customers.

According to the OSC, the losses incurred from Cotten's use of false assets within the exchange amounted to approximately 115 million Canadian dollars (about 10.87 billion won). Losses from unauthorized trading of customer assets at three external exchanges also totaled about 28 million Canadian dollars (approximately 2.65 billion won).

Some customer assets were also used for personal luxuries. Cotten purchased Tesla and Lexus vehicles, luxury yachts, aircraft, and real estate with money embezzled from the exchange. From May 2016 to January 2018, the customer funds Cotten transferred to his and his wife's personal accounts amounted to about 24 million Canadian dollars (approximately 2.27 billion won). Some of this was later returned to the exchange or recovered during bankruptcy proceedings.

The OSC determined that the exchange had been using new customer deposits to pay withdrawals for other customers for 8 to 9 months prior to Cotten's death. This indicates that he was already in a serious asset shortage before he died.

76,000 Victims... Distribution Procedures Continue into 2026

At the time QuadrigaCX collapsed, approximately 76,000 customers were owed a total of 215 million Canadian dollars (approximately 20.32 billion won) in assets. However, the assets recovered and verified by EY amounted to only about 46 million Canadian dollars (approximately 4.35 billion won). The OSC estimated the total customer losses at a minimum of 169 million Canadian dollars (approximately 15.97 billion won).

Recovery for victims has also been limited. In May 2023, EY announced that it would distribute approximately 13.09% of the recognized claims to creditors whose claims were accepted. The digital asset holdings were converted to Canadian dollars based on the price at the time of bankruptcy on April 15, 2019, to calculate the distribution amount. The second interim distribution is still ongoing.

The developments following Cotten's death have been a series of frustrations. The court could not hold Cotten legally accountable since he was already deceased, and the OSC did not proceed with sanctions considering Cotten's death and the exchange's bankruptcy.

However, the crimes committed by Cotten did not simply disappear from the world. The OSC described the QuadrigaCX case as "an old-fashioned fraud wrapped in modern technology." It stated that traditional financial fraud techniques, such as false trading and misappropriation of customer assets, were repeated in the digital asset exchange as well.

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