- BlockHaven
QuadrigaCX: A Potential Risk For Investors
Updated: Jan 22
QuadrigaCX is one of the leading digital asset exchanges in Canada, however, there are a lot of dark secrets behind it, and we would like to warn all canadian investors that this exchange could represent serious operational risks for them.
History and background:
QuadrigaCX is owned by Crypto Capital Corp, an entity registered in Panama, that also owns Bitfinex and C-CEX, two exchanges with their share of controversies. It has been in activity for a few years now with the goal of “providing access to digital asset markets” to Canadian investors. During 2017’s bull run, canadians were in desperate need of exchanges offering fiat CAD/BTC and CAD/ETH pairs to purchase cryptocurrencies, and QuadrigaCX was their only reliable option for a while, until better exchanges came around.
What caught our attention:
Many canadian banks have been blocking transfers going towards QuadrigaCX on numerous occasions, and with good reason. First of all, there seems to be no physical location for QuadrigaCX in the territory of Canada. The exchange is using a bank account in Poland. Now, using foreign correspondent banks is normal for international business entities, but what made us wary of this specific account is that it is based in a bank (Bank Spółdzielczy w Skierniewicach) that only reported 3 million euros in assets in 2010, and 1.5 millions in profits during the same year. Furthermore, the bank account in question is owned by a business entity called Crypto SP.ZO.O, based in Poland. This business entity is owned by an off-shore entity called Crypto Capital Corp, registered in Panama using nominee directors as well. The bank account attached to this business entity is also used by Bitfinex and C-CEX, two other entities owned by Crypto Capital Corp.
Specific Account Information: Beneficiary Company Name: Crypto SP.ZO.O, Address: Polna 2, Postal Code: 05816, City: Michalowice, Province: Mazowieckie, Country: Poland.
This business entity showed a lot of controversy lately, as noted in diverse news releases related to Bitfinex, because it is registered and structured in a way that makes it impossible for us to verify who owns the exchange, and who controls the assets in the entity. As a matter of fact, the account is registered in the name of Ivan Manual Molina Lee. It has been pointed out before that this individual is not connected in any way with the exchanges, and is only a nominee director, which lends his name for a fee to appear on public registry documents. This allows the real owners of the exchanges to conceal their identities (If their business activities of QuadrigaCX, C-CEX, and Bitfinex are supposedly legitimate, why go through so much length in hiding the owner’s identities ?).
You can clearly see that this individual is listed as a nominee director for dozens of Panama-based shell companies. This means that he is not connected in any way with QuadrigaCX, Bitfinex, C-CEX, he just helps the owners conceal their identities by appearing on public registries.
Anonymity/Ghost Owners:
Our biggest concern with QuadrigaCX, Bitfinex, C-CEX and any other exchange controlled by Crypto Capital Corp, is that they ALL use nominee directors and are structured in a way that renders any form of internal investigation impossible. This means that the real owners who control the entities are “ghosts” and cannot be found in case things go south. If any form of exit occured, or any other illegal activities triggered legal proceedings against these entities, the owners could literally set sail and conveniently disappear. We believe in anonymity with cryptocurrencies, however we do not approve that a company handling billions of dollars worth of investor funds can show such a lack of transparency.
The present and acting CEO of QuadrigaCX is Gerald Cotten. However, we believe that he has no real control over QuadrigaCX, because of the following reasons:
1) The entity belongs to Crypto Capital Corp, and any decisions he makes will have to be approved by their parent company.
2) QuadrigaCX does not seem to have real employees, as a simple LinkedIn research shows only the CEO and another unknown user that supposedly work at QuadrigaCX. Both are based in Toronto, despite QuadrigaCX’s PO boxes being based in Vancouver.
This means that the company might just be a front in Canada, with no real operations nor physical office location, only an online exchange maintained by a largely unknown off-shore entity.
A Troubling Lack of Legal Presence in Canada
Another detail that we wanted to point out about QuadrigaCX is that their website is registered anonymously in the Bahamas.
The present WhoIs report shows that the same is registered in Nassau, Bahamas, and not in Canada. This is also a red flag because because it only indicates that QuadrigaCX is a foreign entity that might not even be registered in Canada to conduct real business activities. In fact, we could not find them on any public registry, and the IC-GC registry only covers financial institutions, so QuadrigaCX cannot be found in there either. If we consider the other related entities, such as Crypto Capital Corp, Bitfinex, C-CEX, we can see an established pattern of forced privacy where a web of off-shore shell entities control the exchanges, allowing the real owners to navigate these businesses in any way they please. The real question is why ? That, we cannot answer. However, any legitimate business does not need to use off-shore shell companies and nominee directors to function properly.
Continuous bank problems:
In Canada alone, they had problems with their custodian bank, CIBC. As a matter of fact, this bank froze 25 million dollars that belonged to QuadrigaCX due to their inability in providing a satisfactory source of funds to justify the large deposits into the institution. This quickly led CIBC into believing that QuadrigaCX was involved in money laundering, especially given their overly complex corporate structure and the lack of physical presence in Canada. The case was settled only recently, but users are still reporting many problems when it comes to withdrawing funds from the exchange.
Their close ties to the same entity that is behind Bitfinex makes it very hard for them to forge solid banking relationships, especially due to Bitfinex's past mistakes and incidents that involved money laundering suspicions and other illicit activities. As a matter of fact, the upper management of QuadrigaCX is simply blaming the "lack of friendly environment" for cryptocurrency businesses in Canada for their lack of serious banking relationships. If that revealed to be true, why are other exchanges in Canada able to open bank accounts very easily with the Bank of Montreal and Scotiabank ? Coinsquare was able to open a bank account with the Bank of Montreal very easily. It is not a matter of banks being cold to cryptocurrency exchanges, it is a matter of QuadrigaCX being a sketchy looking entity from top to bottom and when confronted about it, they cannot provide sufficient proofs to dispel such claims to the banks they want to deal with.
The recent death of the CEO is raising many questions:
With the death of the CEO that took over a month to publicly announce, many users are feeling that a lot of factors are not adding up with the story. First of all, the official story is that the CEO died due to "complications related to Crohn's disease during his trip in India in december 2018". However, no proofs of the death in question were ever provided, and the management of QuadrigaCX is still being quiet about the matter. The mortality rate for crohn's disease is only around 3%, which makes this story very hard to believe until legal proofs are provided.
Now, we are not accusing QuadrigaCX of any wrongdoing, but it is our right to assume that, given all the factors discussed, this exchange is plagued with secrets and bad actors behind it. If this wasn't the case, why would they go through so much trouble to conceal the company's activities and owner's identities ? No company with respectable business practices will use this type of overly complex corporate structure unless they had a specific agenda in mind. What is it ? We don't know yet, but given how things are rapidly unraveling, we are starting to have an idea.
The real risks:
Investors should always do their due diligence on the exchanges they deal with, because these entities severely lack oversight, allowing large scale frauds to take place. While we do not automatically assume that QuadrigaCX is a fraud, we want to warn investors that this entity is largely unknown, and that it has taken all the dispositions to stay unknown at the expense of the investors.
This by itself does not constitute a crime, but any investor dealing with large amounts of capital has the responsibility to know and understand the entities he is working with to move his assets. The same goes for QuadrigaCX, and we advise investors to use extreme caution when dealing with this exchange.
Many users reported a very slow, and maybe even inexistent customer service, after complaints and concerns took months to get answered, and many of whom never got any answers at all. Furthermore, a reddit user recently got $700,000 of his own capital locked in QuadrigaCX without ever getting updates or reasons on why his money was frozen. The same kind of freezes occured in Bitfinex and in C-CEX, where users had large amounts of capital being locked in the exchange without any real reasons. This pattern suggests that the exchanges might be locking large sums of capital in an attempt to stay solvent. Even if this suggestion is all speculative, the mere idea that your money can be locked in the exchange for no apparent reason is scary enough to push away most serious investors.
Another important risk is that every deposit is converted into "Quadriga Bucks", this means that legally speaking, your money becomes the exchange's money, and they can revoke your account with your funds in it at any given time without giving you any proper explanations for it. This legal maneuver shields the exchange in the event of insolvency or any other problems related to the customer's funds. Again, this represents a risk that any deposit implies that you give up ownership of your funds and that your money is literally "gone" into a black hole, until you decide to withdraw it from the exchange.
This is the case with most exchanges anyhow, and we always have to remind people the following statement: Not your keys, not your money. The moment you make a deposit in an exchange, you give up the ownership of your money, and this does not apply to QuadrigaCX only. Be very cautious and do not make large deposits at once into exchange accounts.
Alternatives for canadian investors:
Coinsquare is deemed to be the safest in Canada for the following reasons:
95% of the digital assets are held in cold storage.
They have an official office location and they can be located easily.
Their employees can easily be found online.
They accept interac online/interac e-transfers and credit card payments.
Their fees are respectable.
They have an OTC trading desk for large transactions.
We are not promoting them, we are just outlining that there are safer ways to purchase cryptocurrencies in Canada. There is also CatalX which is doing their beta testing as we speak, and is planning to list over 200 alt-coins upon their official opening. We had contacts with both exchanges and we have been very impressed by their transparent and professional approach.
Disclaimer: This release is not mean't to discourage the usage of QuadrigaCX as an exchange service. It is mean't for educational purposes only, to inform the audience about the risks associated with using the exchange. Use QuadrigaCX at your own risk, and be very cautious with how you use the exchange.
Sources:
https://cointelegraph.com/news/bitfinex-in-poland-were-there-money-laundering-links
https://www.coindesk.com/quadrigacx-crypto-exchange-users-say-they-still-cant-get-their-money-out