CSO report indicates that Quadriga operated as a Ponzi scheme

The Ontario Securities Commission (OSC), the regulatory agency that administers securities legislation in the Canadian province of Ontario, said in a report that Quadriga’s failure was due to a Ponzi scheme, a „fraud in the old style wrapped in modern technology,“ according to the OSC.

QuadrigaCX, a Canadian crypto trading platform, announced its bankruptcy in 2019, months after the death of Gerald Cotten, its founder and CEO. What was the cause? According to them, Cotten was the only person who stored the keys to the wallets where the funds were kept in crypto-currencies of all his clients. They all went astray with his departure.

Because of this, they calculated a loss of approximately C$200 million. As expected, many questioned the controversial statement, one of them being the CSO.

The report, made in April but published last Thursday, reveals that the losses of the platform were not due to that tragic event. Rather, it was thanks to Cotten’s fraudulent practices directly linked to a Ponzi scheme. But what is a Ponzi scheme?

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What is a Ponzi scheme?
Ponzi schemes are named after Carlo Ponzi, who tricked investors in the 1920s with a stamp speculation scheme.

A Ponzi scheme is an investment fraud that pays existing investors with funds raised from new investors.

The organizers of these schemes often promise to invest their money and generate high returns with little or no risk. But, in many Ponzi schemes, the fraudsters do not invest the assets, instead, they use them to pay back those who invested before and so they keep most of the money (in the case of Cotten, the crypt coins invested by his clients in Quadriga, according to the CSO).

With little or no legitimate profit, Ponzi schemes require a constant flow of new money to survive. When it becomes difficult to recruit new investors, or when a large number of existing investors demand the profits, such schemes tend to collapse. The CSO stresses in its report that this is what happened in Quadriga, making it a Ponzi scheme.

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Gerald Cotten conned his investors in Quadriga in different ways
The CSO accuses Cotten of trading against his own clients. He also adds that he created fake accounts on other platforms to trade using their funds, without keeping any records:

„Evidence shows that Cotten regularly moved clients‘ crypto assets out of the Quadriga platform into accounts he had opened on other crypto exchange platforms. At one point, Cotten gave a Quadriga contractor a specific wallet address, stating that it was an offline wallet from Quadriga. It was actually a deposit address for Cotten’s account on another trading platform.

Some 76,000 investors in Canada and around the world collectively lost an estimated C$169 million (approximately US$124.2 million) due to the Cuadriga collapse. But the CSO notes that about C$115 million of that amount was lost due to Cotten’s fraudulent practices:

„Most of the asset shortfall, approximately C$115 million, was due to Cotten’s fraudulent operations. Cotten opened accounts in Quadriga under various aliases and credited himself with crypto-currencies and fictitious asset balances that he traded with unsuspecting clients of the platform. Quadriga suffered real losses when the price of crypto assets changed, creating a deficit unable to meet customer withdrawals.

To date, the company has only recovered C$46 million, about US$33.6 million.