600,000 Ethereum (ETH) Lost by QuadrigaCX Found

02-03-2019

Introduction

This report was curated by the CEO and editor of the Zerononcense publication with corroborating information from Jesse Powell, CEO of Kraken Exchange and Taylor Monahan, CEO of MyCrypto.

The author of this report was able to positively identify all exit points for Ethereum in QuadrigaCX-controlled wallets (i.e., transfers from QuadrigaCX not associated with customers).

The author believes that there is a very strong possibility that there may be significant crypto funds (Ethereum) at the following exchanges:

  1. Kraken
  2. Bitfinex
  3. Poloniex

Based on the transaction analysis included in the report, it appears that a significant amount of Ethereum (600,000+ ETH) was transferred to these exchanges as a means of 'storage' during the years that QuadrigaCX was in operation and offering Ethereum on their exchange.

Given the testimony in Jennifer Robertson's affidavit stating that neither she nor the other involved individuals at QuadrigaCX were knowledgeable about where Gerry Cotten was moving and storing crypto, it is very possible that QuadrigaCX, the creditors, and other entities are unaware of this discovery.

If there are still funds belonging to QuadrigaCX remaining on these exchanges, then that would explain why QuadrigaCX and the community (including the author) have been unable to positively locate any 'cold wallets' or 'reserve cryptocurrency'.

It is also worth noting that Jennifer Robertson stated in her affidavit that Gerry Cotten may have stored some of QuadrigaCX's funds on other exchanges.

Therefore, based on the findings of this report, the next logical step for all involved parties to take would be to reach out to the aforementioned exchanges to inquire about any accounts that QuadrigaCX held at these exchanges and whether there are still funds there.

There is no cost for such an inquiry and, given the circumstances, it certainly would not hurt to at least reach out to see if there are any funds remaining in the accounts opened up by QuadrigaCX at these exchanges.

The upside to this inquiry is that, if funds are positively located, the knowledge of private keys or passwords would not be necessary to retrieve them. Given the extraneous circumstances, it stands to reason that the above-listed exchanges would be more than willing to facilitate the transfer of these funds back to QuadrigaCX so that they may be redistributed to their customers.

This discovery may also allow QuadrigaCX to regain solvency and continue operating as well. Thus, all parties stand to gain significantly by reaching out directly to Bitfinex, Poloniex, and Kraken to share this report and/or inquiring about accounts related to QuadrigaCX/Gerry Cotten.

The fact that QuadrigaCX had accounts at these exchanges is established and proven in this report. The question now is whether the funds that were transferred to these exchanges for storage purposes are still there. And even if they are not, the exchanges should at least be able to identify where the funds were then transferred to.

So, in any scenario, this report should serve as a helpful addition to the QuadrigaCX narrative, rather than a conspiratorial piece that speculates on whether the exchange or its owners have been honest.

Report's Findings

The following wallets belong to QuadrigaCX, definitively:

  1. 0x0ee4e2d09aec35bdf08083b649033ac0a41aa75e
  2. 0xd72709b353ded6c8068cc78988613587a4cae8de
  3. 0xb6aac3b56ff818496b747ea57fcbe42a9aae6218 (current hot wallet)
  4. 0x027beefcbad782faf69fad12dee97ed894c68549 (former hot wallet)
  5. 0x45cab8d124fce8663581172c614f2ee08d01d48e
  6. 0x696dd748a2edd9692ed93bd592dd2f293483eada
  7. 0x0247bc4e03142079cfa2e3daf500722ed0f9a6b2
  8. 0xd543154fb94528c4fc54b9c27128c2d86c6322be
  9. 0x67fC93fD01A15D9FB02a80D0AE6207fB45625be4
  10. 0xb90a82ec61627885eab72f4253939285ba40c91d
  11. 0x79855af491352646e73bd12d7b92d6c814e71b4c
  12. 0x57b727dc48b5d9261958e0fb9f94fa02dc328bf6

None of the above wallets are customer wallets and this report will provide in-depth explanations for why they are not customer wallets with corroborating statements from Jesse Powell, the owner of Kraken Exchange.

Altogether, a cumulative 649,708 Ethereum was sent to Kraken, Bitfinex, and Poloniex directly by QuadrigaCX, which was worth a total of $100,490,150 at the time of transfer.

This report does not imply that there was any nefarious intent behind the transfers or that these exchanges are in collusion with one another.

Rather to the contrary, this report believes that Jennifer Robertson, the Court Monitor, and all other related individuals at QuadrigaCX were and are unaware of the fact that Gerry Cotten sent these funds to these exchanges.

The manner in which they were sent is consistent with the t**heory posited in Jennifer Robertson's affidavit that they were sent to these exchanges as a means of storage.**

The author also notes that it was reported by CBC journalist, Jack Julian, that QuadrigaCX testified at the first creditor hearing that they were unable to locate these funds:

Therefore, it is in the author's hopes that this report will serve as the bearer of good news for both QuadrigaCX and its creditors that are seeking to find their funds.

It Starts With a Bitfinex Deposit Wallet Connected to QuadrigaCX

We're going to start this report by looking at a specific Bitfinex deposit wallet address:

https://etherscan.io/address/0xd72709b353ded6c8068cc78988613587a4cae8de

In this wallet specifically, we can see thousands of Ethereum going into a Bitfinex's hot wallet. Notably, the QuadrigaCX hot wallet is seen sending a substantial amount of Ethereum into this Bitfinex hot wallet.

Initially, We Could Not Speculate About the Nature of This Wallet

When this wallet was first discovered, there were two things that we knew:

  1. Withdrawals from the QuadrigaCX hot wallet have been made.
  2. The wallet was sending funds directly to Bitfinex's hot wallet.

Based on the facts above, it could not be said definitively that this wallet belonged to QuadrigaCX exclusively.

This is because customer at the QuadrigaCX could have simply initiated a withdrawal directly to their Bitfinex address for a litany of reasons, including but not limited to:

  • Arbitrage
  • Simply moving to another exchange
  • Preferring Bitfinex > QuadrigaCX

Therefore, based on what we knew, it would have been improper and presumptuous, at best, to assume that there was any foul play going on between QuadrigaCX and Bitfinex here.

Briefly Explaining How 'Hot Wallets' Work

Before we move forward to this report's primary discovery, this report will briefly outline how 'hot wallets' at exchanges work.

What are 'Hot Wallets'?

'Hot Wallets' are 'collection pools' for exchanges. Whenever customers initiate a withdrawal from the exchange, it is more than likely that they will be receiving funds from this wallet.

Below, is an Ethereum deposit to QuadrigaCX by a confirmed customer:

The above transaction, posted with the permission of the customer, is the transaction ID for an Ethereum deposit to QuadrigaCX made by the individual in question (identity kept anonymous to respect the user's privacy).

There is nothing abnormal or illegal about the transaction above.

If readers visit the transaction address, they will see the customer depositing money to an Ethereum address that was created by the QuadrigaCX exchange for that very purpose.

This wallet address was created specifically for the customer in question and, once the funds have entered into the wallet, the customer's account on the exchange is credited with the corresponding amount of Ethereum.

Typically, once funds are sent to this deposit address, the exchange will then 'sweep' the funds into their 'hot wallet'. We can see this happening with this customer's funds in the TX below:

The destination 'hot wallet' address for QCX = https://etherscan.io/address/0xb6aac3b56ff818496b747ea57fcbe42a9aae6218

This hot wallet has been confirmed by Jennifer Robertson's affidavit as well as the Court Monitor overseeing the QuadrigaCX creditor hearing.

So, there is no discrepancy here about the identity of the 0xb6aac wallet address, nor should there be.

Again, to reiterate, the transaction that was just shown is a completely legitimate transaction and the process shown above is typical of all exchanges.

Why Do Exchanges Use This Hot Wallet Process?

For those that do not understand how exchanges work, they may be reading this wondering to themselves, 'Why would exchanges create deposit addresses instead of just having customers send funds directly to the hot wallet?'

This is a great question, but one that has a very simple answer.

The answer is: This process is the only way to efficiently keep track of customer deposits to exchanges and credit their accounts.

Brief Example

If Joe Blow opens an account with Binance (for example) or any other exchange, and wishes to deposit Bitcoin, for instance, then Binance will simply provide them with a deposit address.

By doing so, Binance is able to keep track of exactly how much Joe Blow sent to the exchange.

If Binance were accepting all deposits in one massive wallet, then they would have no way of telling exactly who is sending them money or how much has been sent. Thus, they would have no way of crediting customer accounts.

By providing a unique deposit address that their systems have associated with Joe Blow's account, they will know with certainty exactly how many bitcoins Joe Blow has sent to the exchange. This allows exchanges to set up an efficient, automated system where customers can send money to their deposit addresses at any point during the day and be credited successfully for the amount that they sent.

Key Fact: Customers Do Not Control Deposit Addresses

One key fact that must be enumerated in this report is that customers do not control their deposit addresses.

These wallets are under the control of the exchange themselves because exchanges are the ones that create these wallets. These wallets also exist keep track of customer deposits and credit customer accounts.

Once funds are in a deposit address, they are sent directly to the exchange's 'hot wallet' 99.9% of the time. This is common practice and is standard among virtually exchanges (excluding decentralized exchanges) in the cryptocurrency space, regardless of jurisdiction, size, etc.

Corroborating Statements From Jesse Powell

Since the author is not the owner of an exchange, some may doubt whether the author has the breadth of the knowledge to speak about exchange practice.

Fortunately, readers do not have to take the author's word for it, because the author was able to get into contact with Jesse Powell, the owner of Kraken exchange.

For those that do not know, Kraken is one of the oldest, functioning exchanges in the cryptocurrency space. Kraken has been in operation for 7+ years at this point with Jesse Powell at its head. In total, Kraken has handled well over a $1 trillion in combined transaction volume. Jesse Powell is also a very notable, public figure in the cryptocurrency space and has contributed insight into the inner workings of exchanges on a number of different occasions.

In specific, the conversation between the author and Jesse Powell occurred on Twitter through this thread:

As an added note, this is Jesse Powell's confirmed account and several media sources (including Bloomberg and the New York Times) have also cited this Twitter account as the one belonging to Jesse Powell. There is no dispute over the identity of the @jespow Twitter account.