More than 100 bitcoins linked to defunct cryptoexchange QuadrigaCX mysteriously transferred

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More than 100 bitcoins previously held in inaccessible virtual wallets linked to defunct cryptocurrency exchange QuadrigaCX have been transferred four years after the death of the company’s founder led to its collapse.

It is not clear who moved the 104 bitcoins this month, worth approximately $2.4-million, nor how anyone could do so. Bankruptcy trustee Ernst & Young Inc. said in 2019 that it was not able to access the wallets, meaning the funds could not be recovered to help compensate users who lost money when the exchange went out of business.

“Unfortunately all we know now is that these transfers are unauthorized,” said Magdalena Gronowska, a member of Quadriga’s affected user committee. “I am hopeful blockchain tracing will provide more insights and that we are able to track and initiate a recovery of some funds.”

Ms. Gronowska noted that some bitcoin was sent to crypto mixer services, which disguise the origin and owners of funds, making recovery efforts more challenging.

The exchange’s collapse was touched off in December, 2018, when Gerald Cotten, founder and chief executive of Quadriga Fintech Solutions Corp., died due to complications from Crohn’s disease while on his honeymoon in India.

Read in depth: How did Gerald Cotten die? A Quadriga mystery, from India to Canada and back

Quadriga was once the country’s largest cryptoexchange, and EY found that Mr. Cotten, who lived in Nova Scotia, was the only person with the passwords needed to access the digital wallets in which customer funds were kept. As a result, about 76,000 users were owed $215-million when he died.

The Ontario Securities Commission later concluded that Mr. Cotten, operating with zero oversight or internal controls, was running a Ponzi scheme. He opened fake Quadriga accounts under aliases, credited himself with cryptocurrency and proceeded to make trades. When his bets went the wrong way, Mr. Cotten used client funds to cover his trading losses, along with misappropriating money to fund his lifestyle.

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In February, 2019, one day after the Nova Scotia Supreme Court granted creditor protection to Quadriga, the exchange inadvertently transferred the 104 bitcoins into cold storage wallets that it did not have the private keys to access. Cold wallets are offline storage facilities in which cryptocurrency is held to protect it from hackers.

EY said at the time the transfer was an “error,” and it was told by Quadriga management that a setting on the platform had mistakenly been changed, which triggered the automatic transfer.

Those funds have since moved after remaining dormant for more than three years. The transfer came to light through a Twitter user named ZachXBT, who exposes bad actors in marketplaces for cryptocurrency and non-fungible tokens.

EY said in an update to users Tuesday that it did not initiate the transfers. A spokesperson for Miller Thomson, the law firm representing Quadriga users, declined to comment.

Jennifer Robertson, Mr. Cotten’s widow, said she was shocked to learn about the transfer. “My head is still spinning with all of the possibilities,” Ms. Robertson said in an e-mail, adding that she hopes the funds can be retrieved for users.

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“This is news I never anticipated hearing and I fear the tidal wave of new conspiracies that I’m sure will surface because of it,” she said.

Ms. Robertson endured harassment and death threats from some aggrieved users who suspected her of being involved in her husband’s fraudulent activities.

Users have yet to receive compensation and EY has only managed to recover $46-million in assets. The process has been slow in part because the Canada Revenue Agency had to conduct an audit to determine taxes owed by Quadriga.

“The CRA audit has been the primary obstacle moving towards a distribution in this case,” Miller Thomson said in an update to users this past August. The CRA submitted its claim that month, which Miller Thomson said is a “material step” toward compensating users.

Quadriga’s fall and the death of its founder attracted global media attention at the time, and has since spawned a Netflix documentary and a memoir by Ms. Robertson. In December, 2019, Miller Thomson made an unsuccessful request to the RCMP that it exhume Mr. Cotten’s body and conduct an autopsy, given the “questionable circumstances” around his death.