Front Burner - Inside Canada's Crypto Mystery

Episode Date: March 12, 2019

Reporter Alex Posadzki on how the death of a Canadian cryptocurrency entrepreneur has caused the disappearance of about $180-million in digital currency.

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Coming April 2nd. Hello, I'm Jamie Poisson. So I have to be honest here. I don't fully understand cryptocurrency, and I have tried, I have given this my best college try. But here's what I do know. It's like real money, but you can only spend it on certain parts of the internet. And people are investing tons of money into crypto, kind of like they would stocks or gold. Here's how it's different from real money, though. Crypto isn't backed up by a bank or a government.

When you buy crypto, you can store it in something called a wallet. But often, you're just relying on a private company or sometimes just a single person to keep it safe. Well, in December, one of those people, a Canadian named Gerald Cotton, he died. And he didn't write down the password to his laptop. Without it, more than 100,000 customers who trusted this guy. They're stuck with nothing. Canada's largest cryptocurrency exchange is in hot water and thousands of clients have millions of dollars in frozen assets with little information.

180 million dollars worth of cryptocurrency is now missing. Today I'm speaking with Alex Pazadsky from The Globe and Mail. She's been following this story, which has a ton of twists and turns. It makes people question whether the money existed. How long have these wallets been empty? Are there other wallets that contain this money? That's coming up on FrontBurner. Hi, Alex.

Hi, how are you? So I didn't want to spend a ton of time on this, particularly because this story is such a burn burner. But if you had to explain to me in like crypto for dummies, a couple of lines, how would you do it? 30 seconds tops. Sure. So Bitcoin was one of the earliest cryptocurrencies to go mainstream. You can't put it in your wallet. Your computer makes it and it trades like a stock. It's called Bitcoin. And the idea behind a cryptocurrency such as Bitcoin is that it is a way to transact value through the Internet without any intermediary or third party. So that means that there is no central bank, there is no government backing the currency. It is merely a peer to peer

transfer of value that happens all entirely online. Completely private. And then I know this is also important for the story. We also have to understand what a cryptocurrency exchange is. So let's do that. So a cryptocurrency exchange is. So let's do that. So a cryptocurrency exchange is essentially an online marketplace where people go to buy or sell cryptocurrency. And so you'd go to one of these places, you'd open an account, for example, at Quadriga, you would send them some documents verifying that you are who you say you are, such as a photo of your driver's license or passport. They open you an account. And then in Quadriga's case, they tell you to send some money over to them, typically to an offshore bank account.

Okay, so we've got cryptocurrency, which is just this private currency. And then we've got these crypto exchanges. And when we talk about Quadriga, that's what we are talking about. Quadriga is like a company that processes cryptocurrency. That's what we're talking about. Quadriga is like a company that processes cryptocurrency. That's what we're talking about when we're talking about crypto exchanges. Yeah, it's very similar to how a stock exchange might function or a different kind of currency exchange. So you want to trade one thing for another, you go to a marketplace, they match you with a seller or a buyer, and then you do the transaction. Let's go to Gerald Cotton, who is the guy at the center

of this story. He's Canadian. He started this exchange that we've been talking about, Quadriga. And tell me about Gerald and how he got into this business. Sure. So Gerald Cotton was a Schulich graduate. In around 2013, he started popping up in the sort of Vancouver and Toronto Bitcoin communities talking about how he wanted to start an exchange. If you recall back in the summer of 2013, there really weren't many options here in Canada for people to buy and sell Bitcoins. There was one exchange that was pretty much leading the pack. And then other than that, you pretty much had to send a wire over to Japan. At this point, he met an investor named Michael Patron. The two of them co-founded the exchange together. It went live sometime, I believe it was in 2013 or 2014.

I already had a lot of things set up in terms of the banking and payment processing. So really, it was just a matter of setting up an exchange and then integrating that with everything that I had previously built up. Because there were so few options in Canada, we ended up getting a lot of clients right away. And then was kind of quietly humming along in the background trying to grow. Crypto was still very niche at the time. And what's Gerald like? That's a great question. Gerald is described by people as being very friendly. He was very smiley. He was sort of a feel-good kind of person. When you're around him, he was always very positive, very warm.

Our policy has been a little bit different than a lot of companies. We kind of like to build everything and then surprise everyone with a big launch. We know that he had fairly expensive tastes. We know that he had his own private 51-foot yacht called the Gulliver, which I would assume might be inspired by Gulliver's travels. He might have had ambitions to sail the world. I am kind of inferring that from the name here, though. He had two chihuahuas.

One of them was named Gully. The other was named Nitro. I'm not sure if Gully is also a reference to gulliver's travels but it may well have been he had his own cessna that was parked at an airport in nova scotia um his own airplane he had his own airplane he very bad for 30 years old he very rarely flew it we're that the airplane, which has been described to us as the Cadillac of Cessnas, because it was a very high-end Cessna, was mostly grounded at the airport. And incidentally, when we talked to someone at the flight school where his airplane was grounded, the person there who was in charge of administering accounts told us that she had been trying to track him down for a while

because he wasn't paying his $50 monthly bill for storing his plane there. Okay. So we have this guy, Jerry Cotton, who is a business graduate. Why did people trust this guy in the first place? That's a great question. A lot of people have been wondering because now that we see how this whole thing has collapsed, just how little oversight there was in how it was run. And so, for example, now we're hearing that there was no, essentially no accounting, that there was no accounting system. There was apparently no contingency plan in the event of the CEO's death, that Gerald was kind of running a one-man show with a bunch of contractors around the company. a one-man show with a bunch of contractors around the company. And so when you look at how this thing was run, it does make you question why anyone would have gone with Quadriga as their

option. And there's a couple of pretty good explanations, I think. I mean, Gerald was around in the crypto community since 2013. And so a lot of people had seen his face. He was known to be a very cheerful, very smiley guy. He had this sort of warm smile that a lot of people had seen his face. He was known to be a very cheerful, very smiley guy. He had this sort of warm smile that a lot of people said won them over. And the fact that he was so visible in the community gave people a lot of comfort because a lot of these exchanges were faceless entities. You didn't know who was behind the wheel or what was under the hood. So for people, the fact that Jerry would go and talk at conferences and show up at these local meetup groups gave them this sense of security and confidence that if they had an issue, they could phone Jerry up. And Jerry was this guy who could help them resolve their issues. As opposed to this sort of mysterious figure behind a computer somewhere, which is really how I imagine this whole crypto world.

And then there's also the fact that Quadriga offered better rates. crypto world. And then there's also the fact that Quadriga offered better rates. So a lot of people thought that there was an arbitrage opportunity that if you bought Bitcoin for cheaper somewhere else and then sold it for more on Quadriga and then cashed out, you can make a pretty tidy profit as long as you are prepared to wait the considerable delays involved in cashing out. So like how much money and how many people are we talking about here? So we crunched the numbers, we got some of the data looking at total value of all trading that was happening on Quadriga for the last couple of years. And in both 2017 and 2018, each year, around $1.2 billion of value was traded on the exchange. Okay. And then let's move to 2018. And this is when the floor sort of falls out from Bitcoin. I remember this.

If you think the Dow had a bad day, Bitcoin's was worse. The price is now hovering around $7,000, a jaw-dropping loss of nearly 15 percent. Just check the numbers. Yeah, 15 percent over the course of the day. It lost a ton of value. And people tried to take their money out of Quadriga's crypto exchange. So what happens then? That's right. So then as crypto is falling, everybody starts panicking. They want to liquidate their coins. They want to take out their money. And that's when the problems start to arise. That's when people start seeing that they're trying to get their money out and it's not arriving. And they start reporting these massive delays. Even as early as January, we started January 2018.

We started hearing about people having issues getting their money out, waiting months. The company at the time had a lot of tickets open from customers who were unable to get their cash. And then that's, I guess, where people start panicking. And during this time, what's going on with Gerald Cotton during this year, 2018? Interestingly, I did exchange a couple of emails with Gerald Cotton in relation to a particular legal battle that they were involved in. But in terms of his personal life, this is kind of the period of time in Gerald's life that is a bit of a black box to

us. According to his wife's affidavit, they at this point had moved to Nova Scotia and they were living in Fall River. And he was basically running the company from his laptop in the couple's house. And that's what we've been told. A lot of people who he'd known from the Toronto and Vancouver crypto communities have kind of stopped hearing from him, I guess, possibly because of the move. We tried to find people in Nova Scotia that he may have connected with, but he didn't seem to connect with a lot of the sort of cryptocurrency community in Atlantic Canada. So it seems he became a bit of a recluse at this point in his life. Okay. And at some point he gets married because in December of this year, he's on a

honeymoon. That's right. So him and his new wife, they go to India. They do a couple of touristy things. We believe that they were doing this trip called the Golden Triangle, where you check out a lot of the sort of popular tourist attractions, the Taj Mahal, all that kind of stuff. They get to the Oberoi Hotel and their next stop was that they were going to visit an orphanage that they had helped to fund. Jen had brought teddy bears to give to the children, but they never make it to the orphanage because shortly after checking into the hotel, Jerry falls very, very ill. He's complaining of stomach pain. Now, we know that Jerry had suffered from Crohn's disease for years. His condition was being managed. His wife has said that he was on medication, that it was under control. And so they thought maybe this was just

a case of traveler's diarrhea, very common when you're traveling to new countries, eating new cuisines. So he goes into the hospital, the Fortis Escorts Hospital, which apparently is one of the top hospitals in Jaipur. They take him in. At first, it just kind of looks like a case of traveler's diarrhea. He spends the night in the hospital there with Jen. And in the morning, things take a turn for the worse. He starts having respiratory issues. They take him into critical care.

He ends up having three heart attacks. The first two heart attacks, they manage to resuscitate him. On the third heart attack, they do not manage to resuscitate him, and he is declared dead. This is crazy because this is a guy who is in relatively good health. And then, you know, how does he end up having three heart attacks in 24 hours? So we consulted a Crohn's specialist, a medical expert on this, and asked, what is the likelihood of this sort of thing happening? Does this seem like a medically plausible explanation of what happened to Jerry? What happened to Jerry?

And the doctor told us that basically from the sounds of it, he could have perforated his bowel, which is something that does happen to people with Crohn's disease. And if you perforate your bowel, then the bacteria gets into your entire body and you experience something called septic shock, at which point things like heart attacks and respiratory problems are kind of par for the course, unfortunately. Okay. So to add another twist to this story, there are people who are questioning whether or not Gerald Cotton is even dead. Let's talk about that for a second. There are still some people who believe that he is alive, although I believe our reporter Nathan did a fantastic job on the ground in India overturning almost every stone

speaking to the medical professionals who themselves had treated Gerald Cotton in his last hours. It seems like a very, very, very implausible explanation. Part of the reason why the story has been so fascinating to people, I mean, there's a lot of strange elements here. And we've seen exit scams, so-called exit scams in the crypto space before. So somebody goes, starts up an exchange, gets a bunch of investments, and then just kind of takes the money and runs and disappears. And so I think the suspicion when this news first broke that Gerald had died and the money was gone was that this was an exit scam. Right, because the idea is that he has the passwords. And of course, we talked about there were all of these problems, people not being able to get their money

out. And then it also looked a little bit suspicious to people that just two weeks before he had died, he had updated his will. Oh, interesting. And made his wife the sole beneficiary of all of his assets. Does his wife have anything to say about this? His wife is trying her best to stay out of the public eye. I mean, this is a woman who not only has lost her husband, but also is now receiving death threats from very angry creditors on Reddit who think that she stole their money and that she has used their money for her own business purposes. So she, in addition to mourning, is now also dealing with what she considers to be a considerable personal safety risk. considers to be a considerable personal safety risk. And the yacht and the plane, all of these sort of extravagant things that we talked about earlier, like where is the money coming from to buy this kind of stuff? That's exactly the question a lot of people are asking. Although

if you look at their lifestyle, I mean, they didn't live in such a way that could burn through 180 million dollars. Which is how much is missing right now. That's right. And so, I mean, it is possible given that Jerry was an early adopter of cryptocurrency that this was money that he had made on his own personal Bitcoin investments. I mean, you look at a guy like Anthony DiIorio, who started Decentral, and Anthony's done fantastically for himself. We're so used to giving that trust out to third parties. And I saw right away that that technology can now replace the need for trusted third party entities. That day I bought my first Bitcoin, $9.73. You know, and that's just been off of legitimate investments that he's made.

And now he's purchased the penthouse at the St. Regis Hotel. So this kind of lifestyle is not necessarily not in line with what one might expect from someone who's a successful entrepreneur in the cryptocurrency space. I read that one person has $70 million in this. That was the biggest account. Who else are the people who have invested or put their money in this exchange? Are they just like normal people? It's a pretty broad range of people. We've spoken to a number of them.

I spoke to one guy who's a father of two, and this was just a little bit of extra savings that he had. He's actually a student in Quebec right now. There's a guy who's a software engineer who had his entire life savings sitting there, north of $400,000. He had north of $400,000? Wow. His entire life savings. I thought I would get my money back just like all those other people last year, right? I didn't know that what happened. And I don't think anyone could have predicted this. Like who could have predicted that the CEO would die mysteriously

under mysterious circumstances in India while he was on his honeymoon? And yes, it was because I got too greedy too greedy right I admit that I got too greedy I was trying to make more money on top of the money I already had which was already substantial for a thirty-year-old guy like me so I got really greedy and so I I'm not going to make any excuses for myself I do think I deserve to lose this money because I got too reckless and greedy. Complicating all of this, here's like another twist that the story has taken, is that Gerald has a business partner, the guy that co-founded the company. You mentioned him earlier, a guy named Michael.

I've operated numerous exchanges, merchant platforms, casinos, provided advisory services with respect to growth and development of other such companies. I've been very, very involved with digital currencies for the better part of my adult life. And you found out that Michael essentially might not be who he says he is. Sure. So Michael Patron was a co-founder of Quadriga. He and Jerry started the exchange together in 2013. And we discovered that there have been these long running rumors about how Michael Patron is not who he says he is. These rumors have been circulating in the crypto community for years. And now, given everything that's happened, they've kind of

bubbled to the surface. And so what we have discovered was that Michael Patron previously lived in the United States. He was a California resident, was involved in a group called Shadow Crew. And Shadow Crew was essentially an online marketplace for identity theft and credit card fraud. And at the time, Mr. Patron was using the name Omar Danani. He was arrested in 2004. He was taken into custody and he was ultimately sentenced to 18 months in prison. After being released from prison, he went on to start a couple of different websites. One of them was Midas Gold. It was an exchanger that sold a currency called LR, Liberty Reserve. And Liberty Reserve is the largest black market virtual bank

that at the time had been busted by U.S. law enforcement. It was taken down in 2013. U.S. prosecutors are calling digital currency exchange Liberty Reserve the bank of choice for the criminal underworld. Liberty Reserve was intentionally created and structured to facilitate criminal activity. It was essentially a black market bank. The person that had been registered to was somebody calling himself Omar Patron and Omar Patron which would seem to be an amalgamation of Omar Danani and Michael Patron,

was using an email address, which is an email address we later corresponded with Michael Patron through. Okay. So essentially, if I can boil all of this down, Michael Patron, the guy that founded Quadriga, the company at the center of this mess, because Gerald Cotton is apparently dead in India, his business partner has a history of fraud and has actually spent time in jail in the United States because of it under an alias. And so does this guy, Michael Patron, Omar Patron, does he have the password to unlock all of this missing money? Omar Patron, does he have the password to unlock all of this missing money? Mr. Patron has told us that he has not had any involvement whatsoever in the company since 2016,

that him and Gerald had a falling out, and that though they remained personal friends, they didn't talk about the business anymore because they didn't see eye to eye on it anymore. And so he would be saying no, he doesn't know anything about the company's operations for three years. Why does no one else have this password? Like, this is a guy who clearly had the wherewithal to make a will. Why is there no backup to unlock all this money that people have given him? I think that's what everybody's asking themselves right now.

I think that's a great question that doesn't have an answer at this time. Can anyone, like, break into his computer and get this password? Is there, like, a way? I'm guessing it's not like a Gmail password. Like a way, I'm guessing it's not like a Gmail password. So interestingly, his widow, Jennifer Robertson, did hire a former RCMP inspector to try exactly that, to try to hack into Gerald's encrypted laptop in the hopes that inside the laptop would be the not able to break into the laptop and whatever wallets containing cryptocurrency that he was able to find contained very little or no actual crypto. And so the fact that these wallets didn't contain any crypto, does that raise additional alarm bells here? Certainly it does. It makes people question whether the money existed.

Right. How long have these wallets been empty? Are there other wallets that contain this money? Or has the money been missing for a while? Is it conceivable that even if there was a password, that there would be no money? That there is no money? That's a thing that people are talking about. We definitely might never know if the money is there.

We might never find the money. Wow. Thank you so much for taking us through this story and hope you can come back soon. Thanks for having me. I just want to note, we reached out to Michael Patron, the man who co-founded Quadriga with Gerald Cotton in 2013. He did not return our request for comment. So this bizarre case is really renewing calls for regulation around these new digital currencies. As Alex mentioned in my conversation with her,

the Nova Scotia courts are now wading into this new territory, because right now it's like a black hole. In Canada, an independent government agency called the Office of Superintendent of Financial Institutions, a real mouthful, oversees banks that take money deposits. And some experts are saying that the agency's role could be expanded to include oversight of cryptocurrency exchanges like Quadriga. That's it for today. I'm Jamie Poisson,

and thanks for listening to FrontBurner. For more CBC Podcasts, go to cbc.ca slash podcasts. It's 2011 and the Arab Spring is raging. A lesbian activist in Syria starts a blog. She names it Gay Girl in Damascus. Am I crazy? Maybe. As her profile grows, so does the danger. The object of the email was, please read this while sitting down.

It's like a genie came out of the bottle and you can't put it back.