Hexbyte  Tech News  Wired A Crypto Exchange CEO Dies—With the Only Key to $137 Million

Hexbyte Tech News Wired A Crypto Exchange CEO Dies—With the Only Key to $137 Million

Hexbyte Tech News Wired

More than 100,000 cryptocurrency holders have learned a hard lesson in finality, after the 30-year-old CEO of a major Canadian exchange died, effectively freezing the company’s assets.

In an affidavit filed in the Supreme Court of Nova Scotia last week, Jennifer Robertson, widow of QuadrigaCX CEO Gerry Cotten, wrote that the company owes its customers $190 million, but can’t access the funds to pay them back. In an unusual setup, Robertson said Cotten was the only person with the cryptographic keys to access $137 million of cryptocurrencies kept in “cold” storage to mitigate the risk of hacks. The remainder is similarly frozen, in cash, by ongoing disputes with a bank and payment processors. The six-year-old company is now seeking protection from its creditors as it attempts to access the lost funds. Robertson’s filing was first reported by Coindesk.

On Tuesday, a Halifax judge granted Quadriga a 30-day stay while it searches for the lost crypto, temporarily shielding the company from lawsuits by customers, some of whom reportedly own millions that are now stranded.

Robertson, who wrote that she has become “significantly more involved in the issues” facing Quadriga since Cotten’s death, says she has his encrypted laptop and USB, which may hold the cryptographic keys to the cold storage funds, but doesn’t have the credentials to log in. She says a search of their Nova Scotia home for her husband’s business records turned up nothing, and attempts to hack the laptop by a security contractor have been unsuccessful. According to the CBC, the hardware will be turned over to an independent court-appointed lawyer.

Robertson revealed Cotten’s death on January 14 in a post on Quadriga’s Facebook page. “Gerry died due to complications with Crohn’s disease on December 9, 2018 while travelling in India, where he was opening an orphanage to provide a home and safe refuge for children in need,” she wrote. Her affidavit says Quadriga’s automated systems continued to accept deposits until January 26, more than a month after Cotten’s death.

Quadriga’s strange tale is just the latest mishap to hit cryptocurrencies. Exchanges, in particular, have been the targets of hackers, racking up billions in losses. To reduce exposure, many custodians of cryptocurrency divide the funds between so-called “hot” wallets, used for day-to-day transactions, and offline “cold” storage, which is much harder for hackers to access.


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In this case, that backfired, because Cotten was allegedly the only person with access to the keys. A copy of his will obtained by the Globe and Mail, dated Nov. 27, included $100,000 for the care of his two pet chihuahuas, but apparently no contingency for his personal crypto or business affairs.

“It’s astounding to me that a company of this size can be run with the same accounting procedures of Joe’s Fish ‘n Chips, with a single person in charge and no accountability,” says Emin Gun Sirer, a blockchain adviser and professor of computer science at Cornell University. “That’s far from the norm. It’s not a good look for our industry.”

Tuesday’s hearing offered a glimpse into a one-man accounting operation.

Launched in 2013, Quadriga grew to be one of Canada’s largest exchanges. Michael Patryn, a cofounder of the company who left in 2016, said in a message to WIRED that control of the company’s cold storage crypto had always been centralized. That process didn’t initially spark alarm, Patryn said, because the company had insurance at the time, and its holdings were then relatively small. Large crypto custodians, like exchanges and foundations, typically require multiple people, each with his or her own key, to access funds. Those companies also have backups in case the keys (or the keyholders) are lost, though there are no regulations requiring it. In 2016, all of Quadriga’s directors, apart from Cotten, resigned.

It’s possible, says Sirer, that the laptop and USB could eventually be cracked, or another copy of the keys will be found. In the meantime, customers wondering if they’ll get their money are floating theories of their own. On Reddit, r/QuadrigaCX was swiftly awash in reports of transactions between blockchain addresses theorized to contain the cold storage funds, while users identifying themselves as customers wondered when they would get their money out. Some commentators—including Sirer—questioned whether Cotten had actually died.

A Quadriga customer with CAD$12,640 ($9,606) stranded in the exchange said his ability to make large withdrawals had been curtailed starting last fall. He now believes the frozen funds could be part of a scam, or that the cryptocurrency the company claims to have in cold storage isn’t actually there. “I don’t think I will get the money back and I feel that I have little to no chance to get the truth or justice,” he said.

Robertson, Cotten’s widow, acknowledged the speculation in the affidavit. “There has been a significant amount of commentary on Reddit and other web based platforms about the state of Quadriga, Gerry’s death (including whether he is really dead) and missing coins,” she wrote. She also referred to threats against herself and the company’s director of operations. A lawyer for Robertson did not respond to a request for comment.

A lawyer for Quadriga directed WIRED to a statement posted on the company’s website, noting that Ernst & Young had been named as a monitor for the company. “Filing for creditor protection allows us to work diligently through the process, and to try ensure[sic] the viability of our company,” the company wrote. “We are sure you have many questions. We are in the early stages of a long process and we do not have all the answers right now.”

Robertson’s affidavit included a copy of Cotten’s death certificate, which was corroborated by a Indian government-issued document obtained by Coindesk. Canadian officials also told the CBC that a Canadian had died in India, but could not confirm the identity due to privacy rules.

As for the currency, Sirer says that given the uncertainty, Quadriga should publish the blockchain addresses of its cold storage funds, so customers could monitor the addresses for movements, which shouldn’t occur so long as the sole administrator is dead. “I think it would help with some of the conspiracy theories,” said Patryn. “I would also like to see it.”

In the filing, Robertson wrote that the company would consider a sale of its platform in order to help pay back its customers.

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Hexbyte  Hacker News  Computers Crypto mining giant Bitmain reveals heady growth as it files for IPO

Hexbyte Hacker News Computers Crypto mining giant Bitmain reveals heady growth as it files for IPO

Hexbyte Hacker News Computers

After months of speculation, Bitmain — the world’s largest provider of crypto miners — has opened the inner details of its business after it submitted its IPO prospectus with the Stock Exchange of Hong Kong. And some of the growth numbers are insane.

The document doesn’t specify how much five-year-old Bitmain is aiming to raise from its listing — that’ll come later — but it does lift the lid on the incredible business growth that the company saw as the crypto market grew massively in 2017. Although that also comes with a question: can that growth continue in this current bear market?

The company grossed more than $2.5 billion in revenue last year, a near-10X leap on the $278 million it claims for 2016. Already, it said revenue for the first six months of this year surpassed $2.8 billion.

Bitmain is best known for its ‘Antminer’ devices — which allow the owner to mine for Bitcoin and other cryptocurrencies — and that accounts for most of its revenue: 77 percent in 2016, 90 percent in 2017, and 94 percent in the first half of 2018. Other income is generated by its mining farms, shared mining pools, AI chips and blockchain services.

The company is fabless, which means it develops its own chip design and works with manufacturing partners who bring them to life as physical chips. Those chips are then used to power mining hardware which lets the owner earn a reward by mining Bitcoin and other cryptocurrencies. Bitmain claims over 80,000 customers with just under half of sales in China and the rest overseas.

The company said it posted $701 million in net profit in 2017, up from $104 million in 2016. For the first half of this year, it is claiming a gross profit of $743 million. (Operational profit touched $1 billion for that period.)

Hexbyte  Hacker News  Computers

That’s quite staggering growth, but there are some signs that 2018 comes with more challenges.

Margins are down. Gross margin in the first six months was 36 percent, down from 48 percent in 2017 and 54 percent in 2016. Contributing to that, the cost of sale percentage in the first half of 2018 rose to 64 percent from 51 and 52 percent in 2017 and 2016, respectively.

Bitmain is trying to bat away those concerns by using H1 2018 figures, rather than splitting that period into two quarters. That’s important because the crypto market has plunged massively since January, losing more than half of its value. That has impacted most crypto companies — whether it is exchanges seeing less trading or wallets less traffic — and it is sure to have had a toll on Bitmain.

The question is to what extent?

That’s crucial because it is what will give this IPO momentum, but Bitmain isn’t playing ball and showing us the full picture.

Hexbyte  Hacker News  Computers

Interestingly, Bitmain accepts Bitcoin and other cryptocurrencies as payment for its miners, with some 27 percent of purchases last year paid for using crypto. As a result, those payments aren’t included in revenue but do show up as “investing cash inflow” when they are converted to fiat and used in the business. That’s a 2018 accounting problem right there.

As a result, Bitmain has a negative net cash used in operating activities position but those become positive when factoring in the crypto. The company said it held $887 million in crypto as of the end of the first half of 2018, that’s up from $872 million in 2017, $56 million in 2016 and $12 million in 2015. The company said that changes in the market saw it lose $102.7 million in value from its crypto hoard. During the first six months of 2018, it cashed out $516.5 million worth of crypto, having exchanged $529 million in 2017.

The wild ride of 2017, however, led the company to over-estimated demand and, as a result, its inventory ballooned by $1 billion.

Here’s Bitmain explanation of how it managed to get it so wrong:

In early 2018, we anticipated strong market growth for cryptocurrency mining hardware in 2018 due to the upward trend of cryptocurrencies price in the fourth quarter of 2017, and we placed a large amount of orders with our production partners in response to the anticipated significant sales growth. However, there had been significant market volatility in the market price of cryptocurrencies in the first half of 2018. As a result of such volatility, the expected economic return from cryptocurrency mining had been adversely affected and the sales of our mining hardware slowed down, which in turn caused an increase in our inventories level and a decrease in advances received from our customers in the first half of 2018. Going forward, we will actively balance our business growth strategy, inventories and cryptocurrency asset levels to ensure a sustainable business growth and a healthy cash flow position, and we will adjust our procurement and prediction plan to maintain an appropriate liquidity level.

Despite an extra $1 billion in inventory, Bitmain estimates it has the working capital — including crypto pile and the result of its IPO — to sustain operations for at least another 12 months. That, according to its figures, is around $343 million in cash and cash equivalents but clearly it needs another megahit product or for the market demand to rise again.

Indeed, Bitmain just last week announced its newest mining chip — shrunk down to 7nm — which it believes will offer more power and greater efficiency for miners. That progress coupled with the rising value of crypto — i.e. what owners of Bitmain miners can earn — has helped the company steadily raise the price of its hardware.

Average selling price for its Bitcoin mining machines in 2015 was just $463, but that jumped to $767 in 2016, $1,231 in 2017 and $1,012 in the first half of 2018.

Hexbyte  Hacker News  Computers  

Bitmain co-founder Jihan Wu is the face of the company and one of its largest shareholders with a 20 percent stake

Beyond mining, the company is also developing AI chips, the first of which launched last year. They are used for developing cloud systems, as well as object, image and facial recognition purposes.

Citing third party figures, Bitmain claims to have a dominant 75 percent of the ASIC mining hardware market. It is investing heavily in R&D, which reached $73 million last year and $86 million during the first half of 2018. In addition, around one-third of its 2,594 employees are listed as working in research and development.

Hexbyte  Hacker News  Computers

It’s likely that Bitmain sees more revenue in crypto than any other company on the planet

Bitmain’s document confirms the company raised some $784 million across Series A, Series B and Series B rounds.

Its investor roster is fairly public thanks to leaks and it includes the likes of IDG, Sequoia China, and Kaifu Lee’s Sinovation fund. However, the prospectus does confirm that shareholders include retailer NewEgg, EDBI — the corporate investment arm of Singapore’s Economic Development Board — and Uber investor Coatue. Founders Ketuan Zhan and Jihan Wu are the largest shareholders and they control 36 and 20 percent, respectively.

We can expect Bitmain to flesh out the prospectus with more juicy information, including a target raise which will also generate its valuation. But for now there are over 400 pages of information to process, you can find them all right here.

Note: The original version of this article has been updated to correct the figures for Bitmain’s crypto holdings.

Editorial note: The author owns a small amount of cryptocurrency. Enough to gain an understanding, not enough to change a life.

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Hexbyte  Tech News  Wired The Dark Side of the Crypto Revolution

Hexbyte Tech News Wired The Dark Side of the Crypto Revolution

Hexbyte Tech News Wired

The bitcoin Hodlers, ICO hustlers, and Lambo-owning crypto millionaires would like you to know that the cryptocurrency revolution is upon us. Before long you’ll be making breakfast on the blockchain! But as the trustless, decentralized world of digital tokens expands—and Fortune 500 companies, banks, restaurant chains, and even countries (ahem, Venezuela) cautiously wade in—a credibility problem persists. Silk Road and AlphaBay may be gone, but that hasn’t stopped fraudsters, gamblers, sex workers, and drug dealers from cashing in.

Javier Arce


Escorts, cam girls, and other sex workers now speak fluent crypto. (See: r/GirlsGone­Bitcoin.) At a club in Las Vegas, strippers accept tips in bitcoin, while PinkDate—the “Tinder of escorting”—claims it sold 40 million tokens in a recent coin offering.

Javier Arce


Illegal online betting is much easier when money transfers can be made swiftly and untraceably. (No more payouts postmarked from shady banks in other countries!) Except now your crypto winnings could fluctuate along with the volatile market.

Javier Arce


Cannabis startups such as Paragon and BudBo use blockchain tech to make it easier and more secure for suppliers to track their shipments. Meanwhile, on the dark web, traffickers of harder drugs are attracted to bitcoin’s perceived anonymity.

Javier Arce


Anyone can hype the next bitcoin—including pump-and-dump groups. Coordinating on private messaging services, they pick a random token, ­promote the heck out of it anywhere they can, and then sell at the top, screwing gullible investors.

Javier Arce


Of course a northern Ohio fake-ID manufacturing ring operating on Reddit would prefer to transact in bitcoin. Only rubes use Venmo! The Feds seized $5.1 million worth of the currency from the alleged masterminds, who were indicted in February.

Javier Arce


It’s hard out there for ostentatious bitcoin tycoons, what with crypto robbers kidnapping them and demanding—at gunpoint—access to their digital wallets. Yes, this happens, and it’s one reason more of them are hiring bodyguards.

This article appears in the June issue. Subscribe now.

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