The Ontario Securities Commission (OSC), a regulatory agency that administers securities legislation in the Canadian province of Ontario, said in a report that the bankruptcy of Quadriga was because they were carrying out a Ponzi scheme, a “old-fashioned fraud wrapped in modern technology“According to the OSC.
QuadrigaCX, a Canadian crypto exchange platform, announced its bankruptcy in 2019, months after his death Gerald Cotten, its founder and CEO. What was the cause? According to them, Cotten was the only person who stored the keys of the wallets where the cryptocurrency funds of all his clients were located. They all went astray with their departure.
Due to this, they calculated a loss of approximately C $ 200 million. Unsurprisingly, many questioned the controversial statement, one of them being the OSC.
The report, made in April but published last Thursday, reveals that the platform’s losses were not due to this tragic event. Rather, it was thanks to Cotten’s fraudulent practices directly tied to a Ponzi scheme. But what is a Ponzi scheme?
What is a Ponzi scheme?
Ponzi schemes are named after Carlo Ponzi, who cheated investors in the 1920s with a postage stamp speculation scheme.
A Ponzi scheme is an investment fraud that pays existing investors with funds raised from new investors.
The organizers of these schemes often promise to invest their money and generate high profits with little or no risk. But, in many Ponzi schemes, scammers don’t invest the assets, instead they use them to pay those who invested before and thus keep most of the money (in the case of Cotten, the cryptocurrencies invested by their clients in Quadriga , according to the OSC).
With little or no legitimate profit, Ponzi schemes require a steady stream of new money to survive. When it becomes difficult to recruit new investors, or when large numbers of existing investors demand profits, such schemes tend to collapse. The OSC stresses in its report that this is what happened in Quadriga, turning it into a Ponzi scheme.
Gerald Cotten defrauded his investors in Quadriga in different ways
The OSC accuses Cotten of trading against its own clients. In addition, he adds that he created fake accounts on other platforms to trade using their funds, without keeping any record:
“Evidence shows that Cotten regularly moved clients’ crypto assets off the Quadriga platform to accounts that he had opened on other cryptocurrency exchange platforms. At one point, Cotten gave a Quadriga contractor a specific wallet address, declaring it to be a Quadriga cold wallet. It was actually a deposit address for Cotten’s account on another exchange platform“
Some 76,000 investors in Canada and around the world collectively lost an estimated C $ 169 million (approximately $ 124.2 million) thanks to the Quadriga collapse. But the OSC notes that about C $ 115 million of that amount was lost due to Cotten’s fraudulent practices:
“Most of the asset deficit, approximately C $ 115 million, was due to Cotten’s fraudulent operations. Cotten opened Quadriga accounts under various aliases and credited himself cryptocurrencies and dummy asset balances which he traded with unsuspecting clients of the platform. Quadriga suffered real losses when the price of crypto assets changed, thus creating a deficit unable to meet customer withdrawals“
To date, the company has only recovered C $ 46 million, approximately US $ 33.6 million.
OSC hopes to help prevent these fraudulent schemes
The OSC specifies that it produced the report by interviewing former Quadriga contractors, consultants and clients, in addition to Cotten’s widow, Jennifer Robertson. Quadriga co-founder Michael Patryn did not respond to a request for comment, although the OSC states that most of the lost funds were deposited after Patryn’s departure from the platform in 2016.
“What happened with Quadriga was an extreme example, and not necessarily representative of the broad industry of cryptocurrency trading platforms. However, these events serve to point out to investors the risks that may arise in relation to these platforms, in particular those that are not registered“Concludes the report.
Jeff Kehoe, the director of the OSC’s Enforcement Department, stated that publishing the investigative report was unusual, but necessary:
“While publishing an investigative report is rare, we believe that the tens of thousands of Ontarians who entrusted their money and cryptocurrencies to Quadriga deserve to know what really happened (…) Our goal in making this information public is also to prevent this kind of situation will repeat itself“
And what do you say, Quadriga if it is a Ponzi scheme?