Dive Brief:

• Fraud caused the collapse of Canadian crypto exchange QuadrigaCX, which operated as a Ponzi scheme, the Ontario Securities Commission (OSC) concluded Thursday after a 10-month investigation.
• The exchange's founder, Gerald Cotten, opened accounts under aliases and credited himself with fictitious currency and crypto asset balances, which he traded with unsuspecting Quadriga clients, the regulator found. Cotten sustained real losses when the price of crypto assets changed, creating a shortfall in assets available to satisfy client withdrawals. He covered this shortfall with other clients' deposits.
• About 76,000 customers of the exchange claim they were left without access to $163 million since Quadriga went offline last year, following Cotten's death, which had been called into question.

Dive Insight:

"While public release of an investigative report is rare, we believe the tens of thousands of Ontarians who entrusted Quadriga with their money and crypto assets deserve to know what happened," Jeff Kehoe, director of the regulator's enforcement branch, said Thursday in a statement, according to CBC News. "Our aim in making this information public is also to prevent this type of situation from recurring."

The province's regulator took the case in February 2019 because 40% of Quadriga’s investors were from Ontario.

During its probe, the regulator analyzed trading and blockchain data, interviewed key witnesses, collaborated with overseas regulatory agencies and used third-party and bank information to reconstruct events in the months preceding Cotten's December 2018 death while on his honeymoon in India. The analysis scoured 368,000 client accounts, more than 6 million transactions and thousands of Quadriga-related emails, according to Bloomberg.

"What happened at Quadriga was an old-fashioned fraud wrapped in modern technology," the regulator said, according to the CBC. "Quadriga did not consider its business to involve securities trading and it did not register with any securities regulator. This lack of registration facilitated Cotten's ability to commit a large-scale fraud without detection. So did the absence of internal oversight over Cotten."

Cotten had been in sole control of the company since 2016, and he "ran the business as he saw fit, with no proper system of internal oversight or controls or proper books and records," the regulator said. "Quadriga clients could not have known what Cotten was doing."

The regulator attributed most of the money clients lost to Cotten's "fraudulent" trading. It also determined that Cotten misappropriated millions in client assets to fund his lavish lifestyle.

"OSC Staff would likely have pursued an enforcement action against Cotten and Quadriga," the agency wrote in its report. "However, this is not practical given that Cotten is deceased and Quadriga is bankrupt, with its assets subject to a court-supervised distribution process."

Lawyers for disgruntled Quadriga investors in December asked the Royal Canadian Mounted Police to exhume Cotten’s body to prove he was actually dead. They grew suspicious when they learned Quadriga did not announce Cotten’s death until more than a month afterward, and during that time, the exchange accepted deposits but did not allow some users to withdraw funds.

Quadriga went offline in January 2019, filed for creditor protection and announced that Cotten was the only person who knew the private keys to the exchange's "cold wallets."

"The laptop computer from which Gerry carried out the companies' business is encrypted and I do not know the password or recovery key," Cotten’s widow, Jennifer Robertson, said in court filings. "Despite repeated and diligent searches, I have not been able to find them written down anywhere."

Cotten died from complications tied to Crohn’s disease, which is rarely fatal. However, a death certificate from the Indian hospital where Cotten reportedly died misspelled his name. A gastroenterologist who treated Cotten said the man he saw matched photos of Cotten. But the doctor expressed doubts about Cotten’s diagnosis.