TLDR: Happy 2 year anniversary of Quadriga entering CCAA.
Happy 2 year anniversary of something completely preventable by Proof of Reserve. Not the “proof” where an overseas company registered to a UK shell address says the funds match the platform-provided customer list. Not a 5 years old “proof” where someone high up in Ripple declared backing as full. Actual proof of a real kind. An actual proof.
Happy 2 year anniversary of a joke of a process. A trustee that loses millions in funds. A legal counsel sending mail on an unrelated case. An official committee that never once asked the affected user community what they want. Shut down the only source of revenue, the easiest way to disburse payments, and charge $1,000/hr from victim funds.
Happy 2 year anniversary of not even knowing the simple fact of whether Gerald Cotten is dead or alive. India has a documented known history of death fraud. There are means, motive, and opportunity. We could settle the matter by just having a credible Canadian doctor take one quick look at that coffin. But no, apparently we just never will know.
People have told me what happened here isn’t a “real problem” and I should focus on the “real problems” of the world. How many affected users want to say what happened to them isn’t a real problem? Obviously you wouldn’t still be here if it wasn’t a real problem.
They say affected users need to “take responsibility” for their decisions, and somehow by their twisted logic, that means to walk away. Well, where I come from, “taking responsibility” means to take ownership of something and find an actual solution to fix the problem.
Another thing they say is to “accept” and to “move on”. How is what happened acceptable? And “move on” to what exactly? No one can change the past, of course, but these cryptocurrency exchange disasters keep happening over and over again and still happen.
And they say affected users have “the bankruptcy” to help them… Yeah, who here is happy with that solution? I mean, really, truly, feel that it’s the best solution. You’re going to feel like you’re made whole on what happened because you lost only 80-90%? Hooray?
By the Ontario Security Commission report, $150m of our funds is sitting in the hands of people who traded on Quadriga and withdrew extra money Gerald gave them from our savings. And these people have to gall to come here and “not your keys not your crypto”!
I have to ask what is wrong with some people. I get it that you “won” by unjustly enriching yourself at our expense, and it’s all our fault for storing on Quadriga. Even those of us who were trading at the wrong time or just storing fiat not even cryptocurrency.
We are building a movement to solve these “real problems” that we “accept” and “take responsibility” for. We will “move on” from “the bankruptcy” into a future we create, whether you help or not. Bitcoin is “the money of the people” and we are “the people”.
Here is how we are “solving” Quadriga with our Quadriga Initiative:
Prevention:
If exchange platforms don’t want to provide proof, we can’t force them, but we don’t have to use them either. We are building the first actual Proof of Reserves exchange in Canada through our partnership with TxQuick. Any customer can prove their balance is fully backed, periodically on a regular interval. And it won’t be a complicated proof either. None of this silliness with zkSnarks or third party audit validation processes or Merkle tree root nodes. It’s one hash (or copy paste to a website to do it for you), one search (Ctrl + F), one addition, and one look up on the actual blockchain, that proves without a doubt your crypto-assets are fully accounted for and backed without needing to trust any third party. For fiat, of course we need a third party report, by definition of what fiat is, but we are also looking at ways to have greater certainty here.
I have spent several months studying over 109 cases of cryptocurrency exchange hackings, scams, and frauds, and will be directly advising on the security practices. Ethan Burnside (TxQuick founder) also has extensive experience dating all the way back to 2012 when he ran the BTC Trading Corp without any hacking or fraud - all funds returned to users at the conclusion. In reality, it’s very simple to keep funds secure on a platform. Don’t store them online. Don’t store them in the control of a single person. If there is fraud in one transaction, then don’t ignore it and keep running the platform. That’s every case of customer loss in exchange history covered by 3 simple rules.
Regulators are making things worse.
- Instead of trusting just one party, now you have to trust both the platform and the custodian, because either one can take your funds. Hopefully we can at least get a multi-sig with the platform and the custodian, instead of a system that just forces platforms to add counterparty risk.
- Instead of giving platforms the flexibility to actually generate secure keys held/managed by real people (and helping to train those people), custodial key generation happens in a complex and obscure single supply chain anyone can happily modify if they only find a single point of failure.
- Instead of creating a low-cost environment for platforms so Canadians will use Canadian platforms with oversight, massive compliance costs in a globally competitive market mean that many Canadians will use overseas platforms without any protections.
- So far Canadian platforms have assurance of fund backing from a UK shell company headquartered overseas, no assurance that the customer list was complete, and trusted platforms openly hiding hacks. If platforms want to hide their blockchain assets for whatever nonsensical reasons, we at least need a system where actual credible third parties in Canada can provide assurances on the platforms safely and securely, with proof that all customers were included.
- The insurance model is based on secret policies that nobody can look at, and third party insurance has never paid out a hack or fraud case in the whole history of exchanges. A better model is a multi-sig pool that platform operators pay into, owned and run by a consortium of platform operators, with the full authority to pay affected users directly depending on the situation. This permanent solution would take a lot of work to build.
Regulators just can’t seem to solve these problems properly. They won’t, especially without help. The industry needs leadership in this area. They need an organization that is focused on this one specific key problem. And it needs to be an actual organization - I alone can only do so much by making Reddit posts, websites articles, and sending emails.
Recovery:
As people like to keep saying, “the money is gone”. But “money” is nothing more than a “social credit” you can exchange for utility (products/services) from businesses. Businesses make a profit in every single purchase. This “profit margin” - profit businesses make from the sale - is obtainable with the right negotiation without lowering their bottom line. The fact is that we have a large group who can perform that negotiation, and the fact is that businesses regularly and fairly eagerly give different rates to different groups. They use their profits to do things for marketing to appeal to particular groups or support particular causes. When we tap into that, we tap into billions of dollars.
Some may have heard of Bitfinex, which was an exchange hacked in 2016. They were devastated because they stored all the client money online, and lost hundreds of millions of dollars worth of bitcoin. (And yes, they had a “custodian” in their setup.) While many platforms in that situation would have folded up and declared bankruptcy, leaving their customers waiting years to get a small portion of their funds back, they didn’t. They figured out what was lost, subtracted it off evenly and proportionately, and made it available for immediate withdrawal.
And they didn’t stop there. They created their own “social credit”, a token called the BFX token, and they gave it for free to all their customers in proportion to the USD value of what they lost. Then, they used the operating profits (aka profit margin) to repay each of these tokens back to the lost USD value. Within 7 months, they’d paid back every penny that was lost. Bitfinex isn’t the only platform to solve a hack in this way. NiceHash also finished last November recovering and fully repaying from a similar size hacking case. (Their money was stored in the hands of a single person.)
We are planning a similar model here as the basis for our best effort recovery. Working in partnership with the TxQuick cryptocurrency exchange, which has just recently finally got approval from BCSC to launch, and now only needs funding from accredited investors to hook up fiat banking, we will be creating our own “social credit” and giving it out completely free to affected users for proven loss claims, and then using the TxQuick platform revenue to slowly reimburse the losses over time. So anyone who uses the platform is slowly helping to reimburse the losses of affected users and simultaneously helping to reduce fraud on cryptocurrency exchange platforms.
However, for affected users who are customers, it’s much more efficient to pay directly in tokens. For example,100% payable in tokens on CCAA and bankruptcy anniversaries, and 50% normally, just by holding the tokens in their account. It means affected users effectively automatically pay a lower fee for trading until they recover what they lost. This applies to market taking - market making is already completely free on TxQuick. Use the savings for whatever you want or buy more bitcoin. TxQuick features advanced trading types, a Binance-compatible API, and advanced multi-factor authentication.
In November 2019 we confirmed that there was interest from other businesses as well to support affected users by offering exclusive discounts that accept tokens. HosterBox, Trofeo Auto Coatings, and Coin Trade Ledger are all small Canadian businesses who have agreed to help create a recovery by letting affected users take advantage of special discounts we’ll be setting up. HosterBox even floated the idea of offering some free packages for affected users fully paid by tokens. (With web hosting, the margins are extremely large, so they can afford to do this fairly easily.) Since then, we’ve been slowly building up a list and network of other businesses who may also be interested in helping out as well.
Affected users will have the option (though by no means any obligation) to use or recommend these businesses, spending their “social credit” tokens to save money until they recover the full value of what they lost. We will put together a list, and expand it over time. And, we will organize it as a leaderboard. The business which has done the most “recovery” will get the top spot, and others will be ranked in a similar way. It gives strong recognition to these small businesses for their incredible generosity and strong support of making right what happened here to all affected users. And it recognizes if they choose to offer an even better discount or promotion for a limited time - permanent recognition of that! Eventually, we can grow this website into a full-fledged online marketplace specializing in small businesses that not just accept payment in cryptocurrency, but provide a discount and support fraud reduction at the same time. Cryptocurrency holders have very few options to find such businesses.
I could go into all the ways in which a business can use this for an effective promotion, and the fundamentals of how businesses work to create value, but I believe that everyone fundamentally understands that businesses create value in an economy. And by working with businesses, we can recreate the actual total value of what was lost here in Quadriga, in a way which isn’t just “moving losses around” to other people.
This will, of course, take a lot of work to complete. The total sum is some $200m - $300m or more that’s been lost, which for an average Canadian salary is 5000-9000 man years. By comparison, my estimation is that we can build the similar value by a small group working in a focused manner over the next decade - that’s roughly 100x more efficient. I’ve been researching and laying it out in an 80 page business plan for the past 2 years, and had a number of others also review it, so at this point, I’m fairly confident this can work and scale to the size it needs to recover the full sum.
How do we fund the operating costs of the organization? Some affected users would rather not wait for our recovery or buy at these businesses, lost a huge amount, or downright just think our project will fail. They’d rather liquidate their tokens for a low price. On the other hand, anyone using the platform would like to save money on their trading, or at any of the other businesses. Each token is redeemable for $1, so if they pay 2 cents/token (this was the going market rate during the early part of Bitfinex recovery), and 5 to 25 cents/token to support the cause, they save 73 to 93 cents per token. Buy 100 tokens = save $73 to $93.
In addition to funding the project, the proposed 5 to 25 cent per token fee keeps outsiders from stupidly stockpiling tons of tokens to speculate with, unless their goal is to support our project, in which case they have no issue with the fee as a donation. To be clear, these tokens have no cash value and all recovery is best effort. (They are not a security based on the Howey Test. They are given for free, you should not expect “profit” from a best effort promotion-based idea, the recovery is run by the community in an open inclusive manner, and the token itself is a commodity provided based on a specific defined historic event. Tokens only have to fail one “prong” of the Howey test to not be securities, and these arguably fail all 4 prongs.)
It’s important this be overseen by affected users - not a corporation with a profit focus. For that reason, we are not for profit (which any organization can be if their main goal is something other than profit) and working towards a 501C3 non-profit status - covered as “relief of the distressed”, “advancement of education”, “lessening the burdens of government”, “lessening neighborhood tensions”, and “combating community deterioration”. For the moment, we are simply a group of affected users with a vision to make this situation and similar situations better, and prevent them happening. However, if we get 501C3 status, in addition to the savings that consumers could get from buying the tokens, they could also get a tax receipt for the per token fee as contribution to our cause. Affected users also likely wouldn't pay any capital gains tax when redeeming tokens at businesses, as those work as discounts. (However, the TxQuick best effort redemption to cash is likely a capital gain.)
Our organization/group will work in close partnership with TxQuick initially to launch this recovery, but it’s fully separate. Even though Ethan Burnside is an affected user, TxQuick is looking after their shareholders as a profitable company, using this as a marketing promotion to get a lot of people to sign up for their platform. Quadriga Initiative is run by and advocates for affected users. Our mandate is to make sure the recovery is successful and Quadriga never repeats. If we complete the recovery for Quadriga, we can use our resources, connections, and model to assist other notable fraud cases. It's very important to have this two-organization structure to make sure that the recovery proceeds to conclusion. (Plus, affected users voted on this in our past survey.)
If you have a loss in Quadriga, you can register a free pre-claim by providing your first name, QuadrigaCX client ID, and an email address (forwarder is fine) at https://quadrigainitiative.com/. Note that this is not affiliated with the bankruptcy (see the notice from Miller Thompson here). We will email you further steps for how to sign up and file the full claim once TxQuick comes online, which is still probably a few months away. You can review our privacy policy here, and the privacy policy of TxQuick here. Every part of our recovery is completely free and optional for affected users. It does not impact your bankruptcy claim.
Justice:
If affected users have interest in pushing for exhumation or otherwise advocating particular causes that are of net benefit to our community as a whole, we are happy to work with them to bring this to fruition and connect them with others. Anything which doesn't break the law and is productive to advance the cause of affected users is open for discussion.
The Official Committee, while composed of affected users, has failed to engage with the community (and in fact they’ve now disconnected fully from the Telegram group as well). By contrast, we plan for our group to consult with the community at every stage and our meetings are open for affected users to attend. We regularly seek the input and inclusion of all affected users who will engage in respectful and constructive discussion.
For the moment, until we have a more permanent meeting arrangement, you can come and chat with us most Thursday evenings by participating in the CryptOasis meetup which is run by Jason. This is a Zoom chat, but you are free to chat with audio only if you prefer. CryptOasis is not exclusive to Quadriga Initiative, and is open to chat about other topics as well.
We are looking to build a diverse team with a lot of unique backgrounds and viewpoints. If you would like a more active role, you can join our counsel (providing casual advice periodically) or council (meeting regularly to discuss the project). In addition to the ability to help out a ton, make a real impact on the blockchain space, and meet all kinds of great people, volunteers will have “first dibs” at board membership of our non-profit and any future roles in the organization as we need to fill them. You can attend the meetup or send us an email if you’re interested in helping further.
Feel free to join our subreddit /r/QuadrigaInitiative.
Thanks very much! Please feel free to leave any comments or questions below!
