Decentralized exchanges are crucial for the crypto industry, allowing tokens and coins to be bought, sold, staked, and stored. While most cryptocurrencies and exchanges are legitimate, focusing on security and privacy, this has not always been the case in the past.
In fact, one exchange, in particular, was used to scam users out of $200 million in crypto. This is the story of QuadrigaCX, its criminal owner, and the huge risks associated with the crypto industry.
What Was QuadrigaCX?
QuadrigaCX was a Canadian cryptocurrency exchange founded by Gerald “Gerry” Cotten and Michael Patryn in 2013. Because the crypto industry was a lot less diverse back then, QuadrigaCX only dealt in the trade of Bitcoin (though it soon developed to take on the likes of Ethereum and Litecoin). The company gradually grew over the years to amass over 350,000 customers by 2017 (though, by this point, Patryn was no longer involved in the venture).
Much of this growing customer base could be attributed to the Bitcoin boom in 2017. During that year, Bitcoin’s value surged from just $998 to almost $20,000, which resulted in a wave of new investments in the market and some healthy growth for a wide range of decentralized exchanges.
But this success was not to last. As we all know by now, the crypto market is unpredictable. We saw the extent of its volatility at the start of 2018 when the price of Bitcoin and other cryptos began to plummet and eventually crashed. This sent shock waves through the industry, and those who put money into crypto began to withdraw their investments, fearing that Bitcoin would never recover.
This had a huge knock-on effect on QuadrigaCX and the majority of other exchanges operating at the time. But, unlike the majority, QuadrigaCX was facing a whole new problem in the wake of Bitcoin’s crash, and this is because Gerald Cotten, the founder, built the entire exchange on a lie.
Who Was Gerald Cotten?
If you took Gerald Cotten at face value, you’d probably say he was a very nice guy. Cotten always seemed timid and friendly in interviews, yet passionate about crypto. He was a big supporter of cryptocurrency and was even a member of The Bitcoin Co-op alongside other enthusiasts. He also focused on educating the masses on crypto, which he made clear from the start. On the surface, there didn’t seem to be anything troubling about him at all.
Cotten showed an interest in tech from an early age, but this interest led him to crime at the age of just 14. It was recently found by an anonymous informant known as QCXINT that Cotten operated scams online, conning people out of their money before he had even reached adulthood. But no one was aware of Gerry’s illicit adolescent dealings until after the events in 2018 and 2019.
In December 2018, during his honeymoon in India, Cotten suddenly died after falling ill, allegedly due to his battle with Crohn’s disease. QuadriagaCX’s team and crypto enthusiasts were shocked at this revelation, but there were many more shocking revelations to come.
Shortly after Cotten died in 2019, QuadrigaCX was closed temporarily for maintenance. But the exchange never re-opened, and over a hundred thousand customers were left without a way to withdraw their funds.
One particular customer named Tong Zou lost CAD 500,000 (or just under $400,000), which included his life savings and a huge chunk of cash gifted to him by his parents. Zou’s life was turned upside down by this loss, which he is still recovering from to this day.
So, why couldn’t QuadrigaCX customers withdraw their funds? Well, this is where Gerald Cotten’s true intentions come to light.
The QuadrigaCX Scam
In short, the reason why customers couldn’t get a hold of their money is that Gerald Cotten had taken it for himself. QuadrigaCX was never developed to become a legitimate exchange. Instead, it was a huge Ponzi scheme, wherein Cotten would take one user’s funds and give them to another when they wanted to withdraw money.
This is why, when many customers began withdrawing their funds after the Bitcoin crash, Cotten could no longer fulfill the onslaught of requests. Customers would either end up waiting weeks or months to receive their money or never receive it.
But if one’s crypto is stored in their wallet, it’s safe, right? Unfortunately not. It turns out that Cotten harnessed all the private keys to users’ wallets. A private key is a sort of passphrase used to authorize transactions. So, with tens of thousands of private keys at his disposal, Cotten could get his hands on user funds whenever he pleased.
Cotten managed to transfer almost $200 million to other exchanges using his power. He used some of this to support his high-end lifestyle, but the majority remains at large, with no one seeming to know where it is.
All the wallets Cotten used are empty, and there are no leads to where it may have ended up. What’s more, Cotten didn’t share the private keys to the wallets with anyone else, so the funds couldn’t be accessed even if someone knew their whereabouts.
There are also a lot of suspicions surrounding the death of Cotten. Though his end-of-life doctor has corroborated the claim that he has passed, and there is an official death certificate, many believe that Cotten faked his death to avoid legal pursuit and continue to enjoy his luxurious lifestyle in peace. His fiancé has been investigated, but she doesn’t know much either (though many continue to believe that she is hiding something).
Though Cotten is allegedly no longer with us, it seems he certainly pulled off this scam and managed to trick over a hundred thousand users into unknowingly giving their money away.
But this isn’t where the crypto industry’s criminal history ends. People are conned out of their crypto daily, with many victims unaware of the warning signs to look out for. So, what can you do to keep your crypto safe on an exchange?
How to Keep Your Crypto Safe
When it comes to storing your crypto, we highly recommend that you only use well-established, trusted providers. New platforms may seem exciting but can often be the basis of a sophisticated scam. We have a piece on the best and most affordable crypto exchanges out there right now, which you can check out if you’re still deciding which to choose.
On top of this, you should always opt for an exchange with many useful security features. Unfortunately, a password just doesn’t cut it when it comes to your precious funds, so you need to ensure that you have additional layers of security to keep them safe.
Two-step verification, cold storage, fund insurance, address whitelisting, and non-custodial wallets can all help in keeping your crypto protected, so check out your chosen exchange’s available security features before making any deposits.
Additionally, you shouldn’t give your private key to anyone. This may seem obvious, but giving your key to a trusted individual may make sense if you want a backup. But this trusted individual may lose your private key or store it insecurely, making it easier for malicious parties to get a hold of it and access your funds.
And, on the topic of private keys, we suggest that you do not store them online. This also goes for seed phrases. Without an online connection, a criminal will have a much harder time accessing these crucial passphrases, and there are multple ways to store them offline. This will ensure that your funds stay safe and in your control.
The Crypto Industry Can Be Dangerous
Since cryptocurrency is entirely digital, cybercriminals now see it as a prime target for theft, and even a platform you thought you could trust may end up having malicious foundations.
Hence, it’s crucial to protect your crypto in any way you can. So, check out the tips above and look at your current exchange to ensure you’re making use of all the security features on offer.
6 Crypto Scams You Need to Know Before Buying Bitcoin
About The Author