QuadrigaCX founder gambled with user funds

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If you haven’t heard enough controversy from the QuadrigaCX case, there’s more to add to the pile. According to the latest filing to the Supreme Court of Nova Scotia from court monitor Ernst & Young (EY), it appears Gerald Cotten was using customer funds for his own trades.

The June 19 submission to the court indicated that Cotten, the now deceased co-founder of the Canadian cryptocurrency exchange, likely used user funds for his own margin trading action on other exchanges. EY also indicated that they are worried the exchange just wasn’t being run responsibly, noting it was “significantly flawed from a financial reporting and operational control perspective.”

Part of that irresponsibly was in Cotten’s insistence on controlling everything about the exchange’s operation himself. The other part was in that Cotten could easily mix the operations funds with the customers, and vice versa. The court monitor noted:

“Significant volumes of Cryptocurrency were transferred off Platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten. It appears that User Cryptocurrency was traded on these exchanges and in some circumstances used as security for a margin trading account established by Mr. Cotten.”

They also allege that Cotten used multiple fake accounts in which he made numerous fake deposits, all with the goal of inflating figures on the exchange, and then withdrawing for a profit.

This wouldn’t be so much of a problem if Cotten had made a fortune in margin trading, and his massive wealth could be used to refund customers. Unfortunately, EY noted that he seemed to have lost most of the funds in his margin trading adventures.

As of the latest update, EY calculates the 76,000 QuadrigaCX former users are owed CAD$214.6 million (US$162.2 million).

This won’t be the update that any of those users were waiting for. They’ve been riding a roller coaster of drama since the exchange announced Cotten’s death, with the initial shutdown coming in January, the funds supposedly gone missing for months, and now news that the funds are likely totally gone. The next step in this legal battle will be revealing for how a western country handles an irresponsible, or criminal, crypto exchange.