Establishment of Quadriga
Quadriga launched in December 2013. According to Cotten, its 25-year-old founder and CEO, it met a need in Canada’s burgeoning crypto space: Canadians wanted to buy Bitcoin, but there was no easy way to do it. In late 2013, just before Quadriga launched, Bitcoin was experiencing its first bull run, reaching values well over $1,000 from under $100 at the start of the year. Quadriga presented itself as a platform for Canadians to access Bitcoin and other crypto assets. Initially, Quadriga clients could fund their accounts solely with Canadian dollars or Bitcoin, then trade their assets for the assets of other Quadriga clients. The platform allowed customers to make deposits and withdrawals in Canadian dollars, making it easier for Canadian customers to invest in Bitcoin.
Account Funding and QuadrigaCX Bucks
Clients could transfer fiat currency to Quadriga using a number of methods. These methods evolved over time as Quadriga’s fiat management systems evolved and included Interac online, in-person funding, bank wires, and cash. Clients could transfer crypto assets to Quadriga using a unique wallet address. We estimate that Quadriga controlled over 200,000 Bitcoin addresses alone, plus other addresses for other crypto assets like Ether.
Quadriga’s Terms of Service stated that when a client deposited fiat, the client was purchasing “QuadrigaCX Bucks.” A Quadriga Reddit post explained that Quadriga used QuadrigaCX Bucks so that it would not be considered a “depository institution”. Most of the clients that we spoke to were not aware of QuadrigaCX Bucks. Their account dashboards listed their fiat assets in CAD or USD.
Quadriga derived its revenue from fees charged to buyers and sellers on the trading platform. Fees ranged from 0.2 to 0.5 per cent of the value of each trade and were deducted from clients’ trade proceeds. In most cases, clients were also charged fees for funding or withdrawing from their accounts.
The first year of Quadriga’s operations saw steady growth of its client base, despite a drop in Bitcoin prices to well below those of late 2013. By the end of 2014, assets in Quadriga client accounts totaled approximately 3,600 Bitcoin, CAD and USD 400,000.
All numbers represented in millions throughout this report are rounded to the nearest million.
Cotten, then a recent business school graduate, incorporated Quadriga in British Columbia in 2013 and named himself as its sole director. Quadriga’s corporate documentation described Cotten as “an early entrant into this field” who had been “involved in the so-called alternative payment space for 11 years.” In late 2014, Cotten moved from British Columbia back to Ontario, and in mid-2016, he and Robertson, his future spouse, moved to Nova Scotia. Cotten ran the business from wherever he happened to be, whether he was at home or travelling.
Cotten co-founded Quadriga with Patryn, who was involved with Quadriga from its inception in 2013 until 2016. Patryn had been convicted in 2005 in the United States of conspiracy to transfer identification documents in relation to an online money-laundering service under his prior name, Omar Dhanani.
Following Patryn’s departure from Quadriga in 2016, Cotten ran Quadriga by himself and retained complete control over the company’s fiat and crypto assets. He presided over a team of contractors, all of whom worked remotely on tasks that included maintaining the technical aspects of the platform, verifying account IDs and responding to customer inquiries. Responsibilities were siloed—Cotten was the only person controlling Quadriga’s operations. As one Quadriga contractor put it: “Gerry was the gatekeeper. Everything had to go through him.”
“It never came across my mind that something like this would ever happen in Canada.”
Over 95 per cent of Quadriga clients with an identified residency were Canadian. At first, Quadriga’s active client base grew relatively slowly but between 2016 and 2017 it increased by almost 2,000 per cent. The vast majority of clients deposited either Canadian dollars or Bitcoin to trade on the platform, and the majority of trades were between these two assets.
Quadriga clients had varying levels of crypto asset experience and knowledge. The most active clients transacted hundreds of millions of dollars in assets and completed thousands of trades. Some clients were sophisticated crypto asset traders employing complex arbitrage trading strategies using automated bots that could analyze market activity and trade faster than a human. Others had simply heard about profits their friends had made from rising crypto asset prices and did not want to miss out on the opportunity. Some Quadriga clients were so unfamiliar with the crypto asset market that they depended on Quadriga to answer basic questions about crypto assets and crypto asset trading. Some clients transferred crypto assets to the platform as a means of exchanging different fiat currencies.
Through speaking with Quadriga clients and analyzing their platform activity, we observed that some clients approached Quadriga from a perspective of trust and believed there were safeguards in place similar to those applicable to regulated financial institutions. For example, a Quadriga client who was unable to withdraw approximately $40,000 from the platform in December 2018 explained that while he was using Quadriga, he thought it was monitored, protected and guaranteed by the government. He did not consider that if something went wrong with the platform, he could lose all his money. Some clients felt that Quadriga was trustworthy in part because it was a Canadian company. One individual whose attempts to withdraw approximately $200,000 from his account on the platform failed said, “It never came across my mind that something like this would ever happen in Canada" while another explained, “It is a Canadian company, and I am Canadian, so I [felt] comfortable”. Clients may also have believed that the use of blockchain technology makes platforms more transparent and therefore safer.
Client behaviour on the platform also spoke to their trust in Quadriga. While some clients withdrew their assets from the platform shortly after making a trade, approximately 68 per cent of active clients kept assets on the platform for over 30 days, and 53 per cent kept assets on the platform for at least 90 days. This suggests that many clients believed their platform assets were safe and available for them to withdraw when they were ready.