Research debunks QuadrigaCX’s claim of reserve account for cryptocurrencies

New research suggests that QuadrigaCX does not possess a reserve account which stored cryptocurrencies of their clients. The research report from two independent researchers found that the exchange was using customer funds to pay other customers when they requested withdrawals. “It does not appear that QuadrigaCX has lost access to their Bitcoin holdings,” cited the research.

Recently, QuadrigaCX declared that they couldn’t access $160 million worth of customers cryptocurrencies. They explained that these were kept in cold storage on a laptop which belonged to Gerald Cotten, the CEO of the exchange. On January 15, the company said that Cotten had passed away and it has not been able to unlock the laptop to access customer funds as Cotten was the only one who could unlock the laptop.

Ponzi Scheme?!

The research analyzed deposit and withdrawal addresses of transactions given by QuadrigaCX customers. They charted out the pathway of each address. They found that money did not end up in a reserve wallet. Neither were any withdrawals from a reserve wallet.

Researchers identified a cluster address that belonged to QuadrigaCX which was used to analyze customer transactions. Address clustering is a method which groups addresses belonging to a single owner. The cluster address which belonged to QuadrigaCX never had more than 100 BTC in their account, claims the research.

“The customer withdrawal information related to $BTC transactions on the exchange reflect that QuadrigaCX was clearly re-routing payments from customers to satisfy withdrawal requests from other customers on their exchange, effectively operating a shell exchange or a ponzi,” indicated the research.

The researchers also unearthed other cluster addresses which sent cryptocurrencies to QuadrigaCX. These addresses belonged to exchanges including Binance and HitBTC. “[QuadrigaCX] was forced to aggregate funds from disparate, disorganized locations in order to ensure that the withdrawal was successful,” stated the research. The research implied that compared to other exchanges like Coinbase and Binance shifting Bitcoins from different wallets is considered “highly unorthodox” and “extremely inefficient for any legitimate exchange”.

The exchange’s main cluster wallet address has also sent Bitcoins to the now-defunct exchange Mt.Gox. It was found that the exchange sent over $12 million in Bitcoins to the address belonging to Mt.Gox exchange.

Another important factor to not believe QuadrigaCX’s claim is the multi-signature capability of its cold reserve wallet. Multi-signature will allow at least two parties to have access to the funds. Gerald Cotten and the company, in many of its blogs, has repeatedly established that the wallet had multi-signature capability. If multi-signature was deployed company would still be able to access their funds.

Several theories are surfacing regarding the Canadian exchange’s claims of inaccessible crypto funds. Some say that this is a scam to obtain customer funds. As the CEO has passed away the company only need to get through bankruptcy proceedings. A court hearing that happened on the February 5th has given the company creditor protection of 30 days. The company has five days to settle the debts of the customers. The court has appointed Ernst & Young to oversee the financial proceedings of the exchange.

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