Exit Scam or Mismanagement? Coinbase Digs Into QuadrigaCX’s ‘$150 Million Loss’

February 21, 2019

In a statement, Armstrong shared a theory established by the Coinbase team, emphasizing that it is pure speculation. Until the official investigation of the Royal Canadian Mounted Police is complete, no details in the case can be confirmed.

What’s the Theory of QuadrigaX’s Loss of $150 Million?

As Kraken CEO Jesse Powell said, the story laid out by the QuadrigaCX team that its CEO passed away with $150 million is highly suspicious solely because researchers have been unable to track the cold wallets in question.

The theory of the Coinbase team on the QuadrigaCX case has the highest chance of being close to the nature of the real incident, which remains unconfirmed, because it shows the potential motive of the exchange to announce the loss of $150 million in crypto.

In mid-2017, QuadrigaCX, the largest cryptocurrency exchange in Canada, suffered a critical smart contract bug. At the time, the company said that the bug led to the loss of substantial profits but it claimed that it will no impact on the core operations of the exchange.

QuadrigaCX said in June 2017:

While this issue poses a setback to QuadrigaCX, and has unfortunately eaten into our profits substantially, it will have no impact on account funding or withdrawals and will have no impact on the day to day operation of the exchange.

The company may have attempted to salvage the exchange by employing a variety of strategies. But, as the bear market arrived in early 2018, the company struggled with liquidity, which could have led to the inability of the exchange to process withdrawals.

6. Sequence of events suggests this was a mismanagement with later attempt to cover for it.

— Brian Armstrong (@brian_armstrong) February 21, 2019

As CCN reported, software engineer Tong Zou lost $422,000 in life savings he obtained working for over 7 years in the U.S. for companies in the likes of Walmart.

Speaking to Bloomberg, Zou said that he filed for withdrawal as early as October 2018. The exchange never got back to the developer and Zou discovered the QuadrigaCX situation through media reports.

“I wasn’t using it for trading — I just wanted to move my money over to my Canadian bank account. What I didn’t know was that my withdrawal would be pending or incomplete and it never got deposited in my bank account. I’ve been waiting four months so far,” Zou said.

In consideration of the series of events that occurred prior to the scandal, Coinbase CEO Brian Armstrong said that the Coinbase team speculates that the death of Gerald Cotten was used to salvage the company out of a devastating situation.

Armstrong explained:

This implies that at least few people inside Qadriga knew that they were running fractional. If so, then it’s possible that untimely death of their CEO was used as an outlet to let the company sink.

While this story isn’t perfect, it does seem plausible. I do want to emphasize that these are our best guesses based on the available data. As the case unfolds we might find out we were incorrect.

— Brian Armstrong (@brian_armstrong) February 21, 2019

Is it Possible it’s Just an Exit Scam?

The investigation on QuadrigaCX is still ongoing and the intricacies of the case remain undisclosed and as such, anything remains a possibility.

If QuadrigaCX intended to pull off an exit scam, it could have found a better timing to do it, ideally in the bull market when digital assets were valued substantially higher.

An exit scam and trouble with the company finances are not mutually exclusive, indeed they often go together. When insiders know a company is going under, and thus their personal income in jeopardy, their time preferences increase, increasing likelihood of fraud.

— Nick Szabo 🔑 (@NickSzabo4) February 22, 2019

While the possibility that the entire case is merely an exit scam remains a strong possibility, it is difficult to conclude the accuracy of any theory until all of the details of the case are revealed.

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