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From Law to Lawlessness: Bits of the Untold QuadrigaCX Story

Christine Duhaime, BA, JD, CAMS, practices law with Duhaime Law in Vancouver.

Many of the stories being told about the early operation of the digital currency exchange, QuadrigaCX, are based more on fiction than fact. How do I know? I know because in 2015, I was QuadrigaCX’s regulatory attorney, hired to help their securities attorney in Canada draft a statutory prospectus.

But here’s the thing, and I’m not embarrassed to say it, our firm was terminated after six months. We were terminated because QuadrigaCX executed a management hard fork overnight, which started the company down a path of lawlessness. When I say lawlessness, I mean it solely and only in the regulatory sense.

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

Our firm agreed to act for QuadrigaCX because it was subject to the oversight of several regulatory agencies across Canada. It was registered with FINTRAC, Canada’s FinCEN, and subject to compliance examinations, which are akin to the examinations the IRS conducts on U.S. exchanges with MSB registration; it was a reporting issuer in two Canadian provinces and subject to the oversight of two securities regulators, which is akin to being subject to two SECs supervising its activities; and it was registering in the province of Quebec for anti-money-laundering purposes with that province’s securities regulator.

Not only that, QuadrigaCX had cold storage insurance over its customers’ digital currencies. This was 2015, and if you were in the space back then, you know what a feat it was to secure cold storage insurance 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 it on different matters, two national law firms and two specialized firms, ourselves included. It had a public chartered accountant who prepared financial statements of all its bitcoin trades, its finances and customer holdings. And it also had an independent auditor from an accounting firm and it had audited financial statements.

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

Early days

Back then, QuadrigaCX wanted to launch a blockchain R&D lab and while it barely got off the ground, it did create one project – a refugee payments app that was operational to tackle financial inclusion that would allow the UN and refugees to process payments in bitcoin in areas where banking was inaccessible.

I personally, on my own time and in my personal capacity, jumped in to help QuadrigaCX with that tech because financial inclusion was important to me, as it is important to most digital currency exchanges. I believe QuadrigaCX was the first exchange in the world to launch an R&D lab, and probably the first to develop payments tech for bitcoin acceptance for financial inclusion.

QuadrigaCX’s vision back then was to be the first listed, regulated exchange in the world and dominate the market with superior, self-managing technology. They walked away from the former goal, but considering that, long after my time, they grew to 350,000 customers managed by four employees with a platform built in 2014, they certainly succeeded with the latter, becoming Canada’s largest exchange by a wide margin.

No story of QuadrigaCX is complete without understanding one more fact – six months before we were retained, it had gone through a court-approved plan of arrangement and become three companies, and as a result, it inherited a slew of new shareholders it knew nothing about. (A fourth company was later set up.)

It is my belief that the whole QuadrigaCX team came to believe that the company may have unwittingly become involved in a Vancouver pump-and-dump scheme. Whether it had been drawn into a pump-and-dump is not for me to say because it was before my time, but I can say that QuadrigaCX was run by tech geeks, who were competitive, ambitious and smart but who were unfamiliar with the capital markets ecosystem in Vancouver.

The shareholder question

The QuadrigaCX story has other weird twists.

Our law firm, for example, was recently the target of an extortion event. What happened was that a person demanded, at the beginning of the ongoing creditor protection case in the Nova Scotia Supreme Court, that we give them privileged and confidential information of QuadrigaCX, failing which they would defame us on social media, cause harm to our firm and file a false criminal report against our law firm to law enforcement.

We did not, obviously, give privileged information to strangers but as a result of the extortion of our firm, other people who have relevant information and key documents that could assist with the court process, are now not willing to come forward and be seen as being associated with QuadrigaCX.

I think we all can understand the angst of the loss of our funds, and our firm is one of the larger stakeholders with over $100,000 owed, but I think it’s worth remembering that we’re not each other’s enemy in this process.

If you’ve guessed by now that it’s not accurate, as has been stated, that there are no QuadrigaCX records or documents, you’d be right. There are voluminous records in British Columbia, including court records, accounting records, audited financial statements, bank records, records of contracts, trading volume records, and importantly, records of the cold storage insurance that was still in force a year after our firm exited the client relationship, and still may be.

No party to the proceedings reached out to ask us for the records of QuadrigaCX in our possession, so we wrote to QuadrigaCX’s attorney to let them know what documents we have to assist with the process, and offered to make them available.

People have spilled a lot of ink writing about the shareholders of QuadrigaCX. It is not accurate that there are three QuadrigaCX companies – there are four and therefore, there are four sets of shareholders. It is true that QuadrigaCX re-purchased and canceled much of its issued and outstanding shares up until early 2016.

There were few shareholders left by the time we exited in early 2016, and the shareholder lists publicly available do not appear to be up-to-date. Three shareholders have recently told me that they have never received notice of any annual general meetings and didn’t receive so much as a $1 dividend from QuadrigaCX in three years, despite how profitable it appears to have been.

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

Decisions made

The QuadrigaCX story is by no means over but our bit 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 terminated the professionals that were, in his mind, the “law and order” folks – the accountant, the auditor and me, the regulatory attorney.

From that moment onwards, Mr. Cotten solely took over QuadrigaCX and operated the exchange as if it had no investors, no shareholders, no regulatory agencies and no law that applied to it – no corporate law, no securities law, no anti-money-laundering law and no contract law. I don’t know why Mr. Cotten decided to eschew regulatory law but I never spoke with him after that day. (In January of this year, QuadrigaCX announced he had died a month earlier.)

Like everyone else, there are a lot of other things I don’t know about QuadrigaCX – I don’t know if there is $137 million parked in a few wallets; I don’t know why the bitcoin addresses that were supposed to be holding $92.3 million turned up empty; I don’t know why the wallet address holding $44.7 million of other cryptos can’t be disclosed; I don’t know why no law firm has applied for a Mareva injunction to preserve assets; I don’t know why the litigation is in Nova Scotia when British Columbia Courts have jurisdiction and the witnesses and evidence are in British Columbia; I don’t know why there are statements that there are no records; and I don’t know why the shareholders haven’t tokenized the exchange and made it operational so that customers can start to recover some of their assets.

But I do know this – I’m glad we were let go by QuadrigaCX for being one of the “law and order” folks.

Our legacy with QuadrigaCX covered the period of time when it was as regulated as it was possible to be 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 cold storage wallet insurance.

Let me end on this note – I didn’t want to write this article but I did it because customer assets held by exchanges must be subject to greater regulation and oversight, and unless we improve the accuracy of the available information by hearing from those who have factual knowledge of QuadrigaCX, to understand what allowed QuadrigaCX to be both heavily regulated yet at the same time to resile from that regulation, we won’t be able to fix gaps, restore consumer trust and move the industry forward.

Gerald Cotten image by Stephen Hui via Christine Duhaime

Staking Startup Claims ‘Up to 30%’ Returns for Just Holding Crypto

Blockchain staking-as-a-service startup Battlestar Capital says customers can earn “up to 30 percent” interest annually on their idle cryptocurrency holdings.

Revealing the news exclusively to CoinDesk on Tuesday, Battlestar said that it has partnered with cryptocurrency lending startup Celsius Network to launch a large-scale staking service that provides the potentially high returns. While the announcement did not provide a lower guide for the estimated returns, its website currently states that returns could also be as low as five percent annually via its staking service.

Individuals and funds who do not have expertise or time to manage the day-to-day tasks of staking – supporting a proof-of-stake (PoS) network by holding its token and getting rewards in return – would benefit from the service, Battlestar said, as it protects investors’ holdings, as well as providing portfolio yield.

“Most custody players sidestep staking, and most staking agencies avoid custody because of the risks. Battlestar strategically combines both under one roof,” said Meltem Demirors, an advisor to the company.

Battlestar Capital CEO Adam Carver said:

“After bitcoin[‘s] significant 85 per cent price drop, investors looked to diversify their portfolio through staking other coins. PoS coins [have] emerged as a profitable avenue for investors – including bitcoin maximalists – to gain sizeable yield with their passive holdings.”

Celsius Network aims to add “at least five” more PoS coins (likely tezos, zcoin, decred, horizen and cardano) to its existing 17 crypto assets “over the next three months,” according to a statement.

“Battlestar makes hosting masternodes, like Zcoin’s Znodes, more accessible,” said Zcoin’s chief operating officer, Reuben Yap. “One of their unique features is the use of a secure MPC [multi-party computation] key solution, which fragments a private key and stores its pieces separately to eliminate the risk of a single entry point.”

Battlestar said it has been privately participating in PoS networks since December 2017 when its founders developed a series of algorithms to optimize staking rewards.

U.S. dollars image via Shutterstock 

CMO Lidia Yadlos Shares Her Crazy Ride Over the Last 9 Months

Digitex Head of Marketing Lidia Yadlos joined the company in July 2018. In the real world, that might not seem like much time. But in Crypto, that’s light years! Not only has Lidia presided over the “80% tank” in the crypto market, but she’s also watched the DGTX price soar and raised massive awareness of our project. In this interview, she explains in her own words what it’s like leading our marketing efforts–and why she’s such a firm believer in Digitex Futures. Check it out!

CC: It’s been nine months since you came on as CMO. That’s not very long and yet at the same time, I bet it feels like longer! Tell us about the journey…

LY: Nine months in crypto-land can definitely feel like a lifetime, especially when you come on as the Head of Marketing at a time when the entire market is crashing…

I joined Digitex in July of last year. Crypto was already in the grips of a bear market and the beginning of the 80% tank that we later saw happen in the year.

Fortunately, our project has so much potential, that even from the very beginning I felt how BIG this would be. This motivated me to stay positive and to push our story despite the market conditions.

Rather than focusing on what’s happening around us, we stayed focused on who we are and what makes us unique, so that the rest of the community can also feel the magnitude of this project.

I also recall when I started, our token price was just under 1c. In three months, we hit our ATH of 16c. This achievement really opened my eyes and allowed me to see that what I felt was indeed true, and we just had to keep pushing our marketing efforts, coming up with creative angles which would meet the market conditions.

CC: What made you take on the role in the first place? What made you want to work in blockchain and with Digitex in particular?

LY: To be quite honest, I had considered getting into Crypto back in Oct/Nov of 2017 when the hype was in full mode, but I never saw myself getting serious with it. The industry is in its infancy, so I think a lot of people are still trying to figure it out.

As people often like to tell me it’s the Wild Wild West… and I think that’s what attracts me to it.

Knowing that 10 years from now it’ll have the effect of social media, but greater… It’ll be so intertwined with our everyday lives that we won’t even ask questions like “what is blockchain?” but rather refer to it as “a MUST of everyday modern living.”

So, to answer your question, I like knowing that I’m at the very forefront of it and that I have some sort of influence to its mass adoption.

Why Digitex? A friend of a friend was looking for marketing help, and the opportunity presented itself to me. I explained to Adam what I intended to do and he gave me a shot. And the rest is history.

CC: Were you worried about not coming from a cryptocurrency background? How steep has the learning curve been?

LY: Oh yes, at first I was very intimidated but also extremely excited because I love to challenge myself. I’ve ran a marketing business before. I had experience promoting campaigns, and I like to analyze businesses from a high-level perspective.

I think sometimes that’s what gives me my edge… having run a business before, having faced those challenges. It allows me to look at it as if it were my own business and that pushes me to want to bring the best possible results for Digitex.

On the other hand, being that crypto and futures are relatively new to me, it can be intimidating coming across new terminology!

So, I ask a lot of questions… and fortunately, Adam has been absolutely wonderful to work with because he has all the patience in the world to explain industry terminology.

At the end of the day, I don’t see the learning curve as any sort of set back, rather we often come up with new opportunities for our product because we analyze it and break it down. In many ways, I bring a new set of eyes for our team, which is equally important.

Lidia Yadlos - Digitex CMO

CC: How have you enjoyed the ride so far?

LY: OMG, I love our team! This has been the most exciting project I’ve ever worked on… And we haven’t even launched yet!

We’re also a bit unorthodox… most projects begin promoting after they launch, and we kind of did it the opposite way. Our development and launch process has been in the public eye from the very beginning of our ICO.

And to add, Adam Todd is an incredible leader. Just to work alongside him, and just to see how he communicates with everyone, and how he comes up with these incredible new, abstract ideas… I get the sense that what we’re building will be epic.

Not anyone can do something like this, and I know we have it because we have such a talented team.

CC: What are your greatest achievements, what are you most proud of since joining the team?

LY: Well, when I first came on, I proposed to kick-off a viral marketing campaign. I knew how effective it can be by studying a few other projects. So I worked with Adam to come up with the exact details, and a month in we kicked it off!

I remember Adam told me in a very direct tone: “I want a million users by the time we launch.” And I remember thinking to myself, “Alright then, a million it is… not sure how we’ll do it, but we will.” Nine months in, we did it.

I think it’s also exciting to see the DGTX token value rise over time. People sometimes forget that it’s a utility token and its true value will take effect once the exchange is live. All those traders will eventually use our exchange simply because we’re the best–and they will all have to utilize DGTX to trade.

The fact that our concept has invited so many people to buy DGTX ahead of our exchange launch goes to show that people believe in its value. As a marketer, that’s probably one of the most rewarding things to see happen.

CC: What’s been the hardest thing for you to deal with so far and what challenges still lie ahead?

LY: Development is incredibly challenging, and market conditions equally love to throw curve balls at you. Also, battling regulation issues and winning over influencers’ interest to work with you.

Unfortunately, there’s been a handful of projects which have put a sour taste into people’s mouths about this industry, so it takes a lot of work and effort to prove that we are legitimate. We do offer a unique product and that we have every reason to become a top 10 exchange.

CC: Talking of the future, what’s next on the roadmap for you apart from the imminent launch of course?

LY: This launch has been like a nine-month-long pregnancy, seriously! And as any parent would understand, that’s when the fun really begins. I see this project as my own child.

I learned from Adam from the very beginning that one of the most important features of an exchange is liquidity. And for that, you need tons of traders. So my job over the next year or so will be to continually come up with new, creative marketing concepts which will push tons of traffic and build our user base.

When I look at Binance and see that there are 300K BNB wallet holders, and I see that we currently have just over 10K, I understand that I have my work cut out for me… It’ll be a challenge but I eagerly accept it.

I think the second most important thing is building and expanding our team. I would like to see Digitex triple in size over the next year and attract the best talent in the industry. I believe that great working minds and team synergy is the best work asset.

So once we’re live in action, expect to see continual excitement and buzz about Digitex!

CC: Just how big do you think Digitex is going to be? Where do you see this all going in the next year? Three years?

LY: Well, I’ve definitely been the cheerleader of the team, and my motto is to always stay positive… So to answer your question, it’s going to be EPIC. I think futures, to begin with, are going to become even more popular…

I will invest a lot of our resources into putting out free educational material for people to teach themselves how to trade futures.

I also strongly believe that the market will slowly, slowly start taking on the next bull run. And I foresee this happening near the second half of the year going into 2020. Our timing couldn’t be more perfect… launching futures, offering other assets like stocks, Forex, and commodities, and then introducing spot markets in the Fall. Traders will naturally flock to us because we’re a free exchange. It’s a no-brainer!

So again, by offering a unique product in the right market conditions with creative marketing efforts and a talented team will allow us to turn this into a beast.

In the next three years, I foresee Digitex expanding its business ventures by making many wise business investments. This ties into building strong partnerships and alliances, acquiring new businesses relevant to our industry, most importantly, being at the forefront of developing new technology.

Digitex is a brand, and we intend to continue to build its power and relevance in this industry.

Lidia Yadlos - Digitex CMO

CC: What’s the most important lesson you’ve learned along your journey in crypto so far and what advice would you have for anyone who wanted to start out in this industry?

LY: That’s a tough one. But my personal experience is this, no matter what it is you do you have to love it. So if you’re passionate about this industry then stick with it… I strongly believe in the next few years whatever it is that you do with it, it will be very rewarding.

CC: Anything else that you would like to add?

LY: Well, knowing what I know, I can tell you this… You will never see DGTX this low again. So if you’re willing to follow your gut, as well as do your own research, it’s a no-brainer. You know exactly what it is you need to do. Cheers!

Wrapping It Up

Lidia is probably the most positive and creative person I know, as well as the most hardworking. It’s thanks to stars like her in the Digitex team that we’ve been able to hold our own and even excel in a bear market. We can’t wait to bring commission-free futures trading to the world and are looking forward to things only getting better from here. Join us on Telegram or sign up to our waitlist until 20th April.

E-Commerce Giant Rakuten Wins License for New Crypto Exchange

Japan’s top financial watchdog has granted a license to a cryptocurrency exchange being relaunched by e-commerce giant Rakuten.

The country’s Financial Service Agency (FSA) announced the news Monday, stating that the new exchange, Rakuten Wallet, is now registered with the Kanto Local Financial Bureau as a virtual currency exchange service provider under the country’s Payment Service Act. Rakuten also confirmed the news in a separate statement.

Rakuten Wallet is a wholly-owned subsidiary of Rakuten and replaces an exchange called Everybody’s Bitcoin Inc. that it acquired for $2.4 million last August.

The firm rebranded the exchange offering to Rakuten Wallet on March 1. In its announcement, Rakuten also said it is ceasing the older service at the end of this month and that users can sign up for the new Rakuten Wallet service from April.

The firm also said Everybody’s Bitcoin had been operating as a “deemed” cryptocurrency exchange provider since its launch in March 2017, having applied for a license at the time. The firm received a business improvement order from the Kanto bureau last spring, and has “officially restructured” its management system and upgraded internal systems in order to receive the license for the rebooted entity.

The FSA at the same time issued a license to another exchange called DeCurret, which says it will provide spot trading of four cryptocurrencies from April 16 in Japan. New accounts start opening from March 27. DeCurret’s shareholders include notable firms such as MUFG Bank, Nomura Holdings, Internet Initiative Japan Inc., Daiwa Securities Group and the Dai-ichi Life Insurance Company, among others.

In January, the FSA also granted license to Japanese crypto exchange Coincheck, which suffered a $530 million hack early last year. With the two new approvals, the number of licensed cryptocurrency exchanges in Japan now stands at 19, according to the FSA announcement.

Rakuten image via Shutterstock

Binance Tightens Compliance, Turning to IdentityMind for KYC

The world’s largest cryptocurrency exchange Binance is moving to boost compliance and data security through a new deal with Medici Ventures portfolio firm IdentityMind.

IdentityMind announced on Tuesday that it has partnered with Binance to “improve existing data protection and compliance measures” for the exchange’s global operations.

IdentityMind provides cryptocurrency exchanges a “real-time” platform to comply with know-your-customer (KYC) and anti-money laundering (AML) regulations worldwide to prevent fraud, according to the announcement. The startup helps cryptocurrency exchanges with client onboarding, transaction monitoring and case management solution.

IdentityMind CEO and president Garrett Gafke said:

“Our risk and compliance platform powered by a patented digital identities engine meet the scale demands of Binance’s global operations while providing a highly accurate system for assessing any global risk factors from outside entities for transactions.”

The news appears to indicate a shifting stance from Binance, which has previously avoided the strict compliance route chosen by other top exchanges such as Coinbase.

Binance’s KYC processes are “the industry’s least rigorous,” said a report from Bloomberg last year. Users only need an email address to open trading accounts with the exchange, the report said, adding that this “level of anonymity” makes it hard to track money laundering and market manipulation.

Since then, however, Binance has been making efforts to raise its compliance game. Back in October, the exchange partnered with cryptocurrency compliance and investigation software provider Chainalysis to monitor cryptocurrency transactions in real-time and potentially avoid any criminal or illicit activity.

It also, the following month, collaborated with Refinitiv, formerly the financial and risk business division of Thomson Reuters, for an automated KYC solution.

Binance logo image via Shutterstock 

TrueUSD Stablecoin Holders Can Get ‘Up to 8%’ Interest Via CredEarn

Holders of the dollar-pegged stablecoin TrueUSD can now leverage their funds to generate returns under a new partnership between the token’s developer TrustToken and crypto lender Cred.

The deal will enable TUSD holders take part in the CredEarn program, which pays back interest for loans of digital assets to Cred’s platform. Within the U.S., TUSD holders in 29 states can participate in the program.

David Steinrueck, marketing and communications manager with TrustToken, told CoinDesk that individuals who send their funds to Cred can earn “up to 8 percent” in annualized returns.

Under the terms of the partnership, TrueUSD holders must transfer their tokens to a CredEarn wallet for a minimum six-month commitment. They will earn interest quarterly, and can renew their accounts for three months after their initial term expires.

“The reason that we say ‘up to’ is that at the current time … legally, we can’t say guaranteed … because it is an investment,” Steinrueck explained. “If you lock your funds in here, you’ll get an 8 percent return, you’re locked into that rate and after a 6-month rate or quarterly [you get your return].”

CredEarn will, in turn, lend the assets to miners, investment funds, retail investors and other digital asset companies “on a guaranteed and collateralized basis,” though it will not lend to short-sellers. Returns from these entities will be passed on to holders.

Steinrueck likened the feature to a bank account or a certificate of deposit (CD) investment, saying:

I would say that … there’s definitely risks and you’re taking out some risks because it’s an investment, but there’s not a scenario here where they’ll say ‘oh we’re only giving you 7 percent or 5 percent,’ you’re locked in. So the risk the consumer is evaluating is ‘do the people who stand behind these assets [have] insurance … do we trust those people to generate those returns and evaluate their consumers and load process accurately?’”

As such, he added, any risks from a consumer standpoint would be evaluating the companies participating in providing the accounts.

Uphold, BitGo, Bittrex and Ledger are acting as custody providers for the funds sent to CredEarn, according to a press release. BitGo will provide insurance on customer assets up to $100 million through its separate partnership with Lloyd’s of London. The firm noted that BitGo Inc., and BitGo Trust Company would custody different assets separately, but assets will be insured either way.

The new CredEarn offering sounds similar to BlockFi, another crypto lending startup which announced a crypto deposit account at the beginning of this month. The company said users would be able to earn 6.2 percent interest on their holdings annually, though it later cut this figure for its institutional investors.

BlockFi said it has already taken in more than $35 million for the deposit accounts, with $25 million coming in the first two weeks after the accounts were announced.

Image via Shutterstock