From the law to the absence of law: pieces of the untold story of QuadrigaCX



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Christine Duhaime, BA, JD, CAMS, acts in Duhaime law in Vancouver.


Many of the stories told about the initial operation of the digital exchange, QuadrigaCX, are based more on fiction than on facts. How I know? I know why, in 2015, I was QuadrigaCX's attorney, hired to help his securities attorney in Canada draft a statutory prospectus.

But here's the thing, and I'm not embarrassed to say this, our company was shut down after six months. We were shut down because QuadrigaCX ran a hard management fork overnight, which put the company on the path of illegality. When I say anarchy, I mean only and only in the regulatory sense.

Before we get into that, let me dispel some myths about QuadrigaCX.

Our company has agreed to operate for QuadrigaCX because it was subject to oversight by several regulatory agencies throughout Canada. Has been registered with FINTRAC, the Canadian FinCEN, and subject to compliance examinations, which are similar to the IRS examinations carried out on the US stock exchanges with the MSB registration; was a reporting issuer in two Canadian provinces and was subject to the supervision of two securities regulators, which is similar to being subject to two SECs that oversee its activities; and was registering in the province of Quebec for purposes of combating money laundering with the provincial securities regulator.

Not only that, QuadrigaCX had cold storage insurance on the digital coins of its customers. That was 2015, and if you were in space back then, you would know that it was a challenge to secure cold storage for a digital currency exchange.

I believe it may have been the first exchange in the world to have cold storage insurance.

QuadrigaCX had at that time four different law firms, advising on different matters, two national law firms and two specialized firms, including ourselves. He had a public accountant who prepared financial statements for all his bitcoin businesses, his finances, and his stake in clients. He also had an independent auditor from an accounting firm and had audited financial statements.

By 2015, it was practically unheard of for a digital currency exchange to have an auditor and prepare audited financial statements that were made available to the public. It was more transparent than many exchanges today.

First days

At that time, QuadrigaCX wanted to launch a blockchain R & D laboratory and, although it took off, created a project – a refugee payment application that was operational to deal with the financial inclusion that would allow the UN and refugees to process payments in bitcoin . areas where banks were inaccessible.

Personally, in my own time and on a personal basis, I jumped to help QuadrigaCX with this technology because financial inclusion was important to me as it is important for most digital currency transactions. I believe that QuadrigaCX was the first exchange in the world to launch a research and development laboratory, and probably the first to develop payment technology for accepting bitcoins for financial inclusion.

QuadrigaCX's vision at that time would be the first regulated and listed stock in the world and dominate the market with superior, self-managed technology. They moved away from the old goal, but considering that, long after my time, they grew to 350,000 clients managed by four employees with a platform built in 2014, they certainly had success with the latter, becoming Canada's largest a wide margin.

No QuadrigaCX story is complete without understanding one more fact – six months before we were retained, it had gone through a settlement plan approved by the court and became three companies and as a result inherited a number of new shareholders. about. (A fourth company was created later.)

I believe that the entire QuadrigaCX team came to believe that the company may have been involuntarily involved in a Vancouver pump-and-dump scheme. If it was pulled into a pump-and-dump it's not for me to say why it was before my time, but I can say that QuadrigaCX was run by technology geeks, who were competitive, ambitious and smart, but who were not familiar with the capital markets ecosystem in Vancouver.

The issue of shareholders

The story of QuadrigaCX has other strange twists.

Our law firm, for example, has recently been targeted for an extortion event. What happened was that a person demanded, at the beginning of the current process of creditor protection in the Nova Scotia Supreme Court, that we provide QuadrigaCX privileged and confidential information, without which they would defame us in social media, would cause harm to our company. and file a false criminal report against our law firm for law enforcement.

Obviously, we do not provide insider information to outsiders, but as a result of our company's extortion, other people who have relevant information and important documents that could assist in the legal process are now unwilling to appear and be seen as being associated with QuadrigaCX.

I think we can all understand the anguish of the loss of our funds, and our company is one of the largest stakeholders with more than $ 100,000 in debt, but I think it's worth remembering that we are not enemies of each other in this process.

If you have guessed that it is not necessary, as has already been said, that there are no QuadrigaCX records or documents, you are right. There are voluminous records in British Columbia, including court records, accounting records, audited financial statements, bank records, contract records, turnover records, and especially records of cold storage insurance that was still in effect one year after our company have left. the relationship with the customer, and still can be.

No party to the process contacted us to request QuadrigaCX's records, so we wrote to QuadrigaCX's attorney to inform them of the documents we have to help with the process and offer to make them available.

People have spilled a lot of ink by writing about QuadrigaCX shareholders. There is no need for there to be three QuadrigaCX companies – there are four and therefore there are four sets of shareholders. It is true that QuadrigaCX repurchased and canceled most of its issued and outstanding shares until the beginning of 2016.

There were few remaining shareholders by the time we left in early 2016, and the lists of publicly available shareholders did not seem to be up to date. Recently, three shareholders have told me that they have never received notification of annual general meetings and that they have not received a $ 1 dividend from QuadrigaCX in three years, regardless of how profitable it appears to be.

If this is true, it means that shareholders may not have been allowed to vote on QuadrigaCX matters or vote in the direction of the company.

Taken decisions

The story of QuadrigaCX is by no means over, but our part of the story ended abruptly one morning when its CEO, Gerald Cotten, made the decision that he no longer wanted QuadrigaCX to be a listed company.

On that day, he closed down the professionals who were, in his mind, the people of "law and order" – the accountant, the auditor, and myself, the regulator.

From then on, Mr. Cotten only took over QuadrigaCX and operated the stock exchange as if it had no investors, shareholders, regulatory agencies and no law applied to it – no corporate law, no securities law, no anti-money law. laundering and without contract law. I do not know why Mr. Cotten decided to avoid regulatory law, but I never spoke to him after that day. (In January of this year, QuadrigaCX announced that he had died a month earlier.)

Like everyone else, there are many other things I do not know about QuadrigaCX – I do not know if there are $ 137 million parked in some portfolios; I do not know why the bitcoin addresses that should have been $ 92.3 million were empty; I do not know why the wallet address that holds $ 44.7 million from other cryptos can not be disclosed; I do not know why no law firm has requested a Mareva injunction to preserve assets; I do not know why the litigation is in Nova Scotia when the courts of British Columbia have jurisdiction and the witnesses and evidence are in British Columbia; I do not know why there are statements that there are no records; and I do not know why shareholders did not usurp the exchange and make it operational so customers could start recovering some of their assets.

But I know this – I'm glad we were released by QuadrigaCX for being one of the people of "law and order".

Our legacy with QuadrigaCX covered the period of time it was regulated in Canada in 2015 for a digital currency exchange when it had Canadian bank accounts and audited financial statements and when customers were protected with a secure chilled portfolio.

Let me finish on this note – I did not want to write this article, but I did it because customer assets held by exchanges should be subject to greater regulation and supervision, and unless we improve the accuracy of the information available by listening to those who have factual knowledge of the QuadrigaCX, to understand what allowed QuadrigaCX to be regulated and at the same time to reformulate this regulation, we will not be able to fix gaps, restore consumer confidence and lead the industry forward.

Picture of Gerald Cotten by Stephen Hui via Christine Duhaime

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