Downfall of Quadriga (2018)
As crypto asset prices fell, many Quadriga clients wanted to cash out. Cotten struggled to keep up with increasing withdrawal requests, and operated Quadriga like a revolving door.
The Crypto Market Bottoms out and Cotten faces a Cash Crunch
As 2017 was a year of highs for crypto asset prices, 2018 was a year of lows. Bitcoin prices peaked around mid-December 2017, then began to plummet. A few weeks later Ether prices followed suit. The crypto price drop gutted the value of Cotten’s Ether holdings—Ether he had purchased with fake dollars and fake Bitcoin. Although Cotten’s short Bitcoin positions were profiting from falling Bitcoin prices, his Ether positions were much larger; overall, Cotten’s holdings were suffering heavy losses. Demand for crypto was slowing and Quadriga clients were cashing out. Through his Chris Markay account, Cotten stepped in, using fake Canadian dollars, to act as counterparty to clients looking to sell their crypto assets for Canadian dollars. However, he had to find real Canadian dollars to pay for the clients’ subsequent withdrawals. This proved difficult because, for months, Cotten had been misappropriating client assets both to fund withdrawals and to pay personal expenses. As a result, Cotten was running dangerously short of Canadian dollars, American dollars and crypto assets.
The crypto price drop gutted the value of Cotten’s Ether holdings—Ether he had purchased with fake dollars and fake Bitcoin.
Payment Processor Troubles
Around the same time, in January 2018, the Canadian Imperial Bank of Commerce (CIBC) froze accounts connected to Billerfy, one of Quadriga’s main payment processors. This rendered $26 million in Quadriga clients’ funds inaccessible. Litigation related to the frozen funds continued throughout 2018 and the frozen funds remained unavailable to Quadriga during that time. These funds were eventually released to the payment processor and later transferred to Ernst & Young after Cotten's death.
Quadriga may also have lost access to funds held with an offshore payment processor. Records in respect of this payment processor showed an account balance of $12 million as of April 2018 (composed of a Canadian dollar account with a balance of CAD 9 million and an American dollar account with a balance of USD 2.5 million). Quadriga contractors recall that at some point this payment processor stopped communicating with Quadriga. After Cotten’s death, the payment processor reported to Ernst & Young that it held a near-zero balance for Quadriga. Ernst & Young reported on June 19, 2019 that the payment processor did not provide any documentation to support this assertion. We did not see records establishing what became of the $12 million or that the money had been returned to Quadriga. We sought information from this company through multiple channels, but it provided us with no documents.
Quadriga began struggling to fulfill withdrawal requests.
Around the same time as the CIBC account freeze, Quadriga began struggling to fulfill withdrawal requests. Cotten publicly blamed the withdrawal problems on the asset freeze, but this was a small part of a much larger asset shortfall caused mainly by Cotten’s fraudulent trading.
Quadriga Plunges into Financial Crisis
By early 2018, clients were flooding Reddit with complaints about delays in receiving funds. The media began publishing stories about clients whose funds were missing or whose transactions took weeks or months to process. Cotten dismissed concerns, generally blaming the CIBC account freeze, or the clients themselves, rather than Quadriga’s own processes or problems. At the time, a Quadriga representative told the media that none of its customers had ever lost money due to a funding or withdrawal issue.
By March 2018, Cotten was operating Quadriga like a revolving door.
In reality, Quadriga’s financial situation was dire and assets held on the platform were dwindling. By March 2018, Cotten was operating Quadriga like a revolving door. Canadian dollars, American dollars and crypto assets deposited by clients to fund their accounts were immediately re-routed to fund withdrawals by other clients. However, with the flood of withdrawal requests, the outflow of real assets—especially Canadian dollars—from the platform greatly outweighed the inflow of real assets. In an effort to keep up with the demand for withdrawals, Cotten was also selling off the platform’s remaining crypto assets, cashing them in at the prevailing low market prices. He also transferred back to Quadriga some of the $24 million he had previously transferred to himself and Robertson for personal use. Between August and December 2018, Cotten transferred approximately $10 million from his personal bank account to a payment processor, which distributed it to clients.
Cotten was also selling off the platform’s remaining crypto assets, cashing them in at the prevailing low market prices.
The following chart shows the discrepancy between Quadriga’s assets and liabilities, with crypto assets valued at their Canadian dollar equivalent, from May 2017 to early 2019. It should be noted that while the difference between the assets and liabilities amounts drops during 2018, this is mainly due to the decrease in crypto asset prices. We estimate that, regardless of crypto asset prices, Quadriga was unlikely to return to a solvent financial position.
Quadriga Assets vs. Liabilities (includes crypto and fiat assets)
In October 2018, Robertson and Cotten got married in a small, private ceremony in Scotland. They made plans to honeymoon in India, where they were funding the construction of an orphanage. In early December, while already in India, Cotten made two transfers totaling $500,000 from his personal account to fund client withdrawals. Shortly thereafter, he and Robertson checked into the ultra-luxury Oberoi hotel in Jaipur, India.
Cotten's Death Exposes Quadriga’s Dire Financial Situation
The Quadriga website reported that it was offline.
Cotten's Death Exposes Quadriga’s Dire Financial Situation
Cotten died in India on December 9, 2018 while on his honeymoon. New directors were appointed, who decided to suspend activities on Quadriga’s platform. The Quadriga website reported that it was offline.
Cotten’s death, and the ensuing efforts to locate assets, exposed the extent of Quadriga’s problems. It was widely believed that the bulk of the asset shortfall was due to lost or inaccessible private keys; however, this was not the case. As described previously, Quadriga was already in crisis before Cotten’s death, and most likely would have collapsed even if Cotten had lived. By the time of his death, the platform owed approximately $215 million to clients but had almost no assets to cover By November 2016, Cotten had injected so many fake assets into the platform that its eventual insolvency was all but assured. However, until it was ultimately shut down by the new directors, Quadriga never stopped accepting new clients and new deposits, even while teetering on the brink of collapse.
By November 2016, Cotten had injected so many fake assets into the platform that its eventual insolvency was all but assured.
At the time of his death, Cotten had no access to most of the funds that were later recovered by the Trustee Ernst & Young. The majority of the recovered assets consisted of funds that were still frozen by CIBC at the time of Cotten’s death.