If you don’t have the key, cryptocurrencies are known for being difficult to crack.
Digital-asset exchange Quadriga CX has found that out the hard way.
The online startup is having difficulty retrieving C$190 million (AU$200.5 million) in Bitcoin, Ether, Litecoin and other cryptocurrencies held for its customers after its CEO, Gerald Cotten died while holding sole access to Quadriga CX’s digital wallets.
He died from complications of Chron’s Disease at age 30 while visiting an orphanage in India last December.
Digital wallets are the applications which store the keys used by token-holders to send and receive cryptocurrencies.
According to court documents filed last month, Cotten was security-conscious, with the laptop, messaging systems and email service he used to run the business encrypted.
And as he took sole responsibility for handling the funds, the ability to regain them is limited.
As his widow Jennifer Robertson said in an affidavit, she can’t find his passwords or business records. Even experts brought in to try to hack into Cotten’s other devices had only “limited success”.
“After Gerry’s death, Quadriga’s inventory of cryptocurrency has become unavailable and some of it may be lost,” Robertson said.
Continuing, she said the company’s access to the tokens had been “severely compromised”.
The directors of the firm told investors last month they were asking the Novia Scotia court for creditor protection while they attempt to solve the problem, and unlock their customers’ tokens. A hearing is scheduled for Tuesday on the matter.
“We have worked extensively to address our liquidity issues, which include attempting to locate and secure our very significant cryptocurrency reserves held in cold wallets, and that are required to satisfy customer cryptocurrency balances on deposit, as well as sourcing a financial institution to accept the bank drafts that are to be transferred to us,” the firm said on its website on 31 January.
“Unfortunately, these efforts have not been successful.”
While they may seem extreme, Cotten’s moves to secure the funds by placing the keys in “cold” or offline wallets, and encrypt his devices aren’t surprising given the swathe of devastating crypto hack attacks in recent years.
In fact, there were five major attacks in 2018 alone, making it a record year.
‘It’s going to be a massive issue’
This is likely the first in a series of high-profile and complex struggles to regain access to crypto assets, Australian Unity Trustees’ director of estate planning Anna Hacker told Yahoo Finance.
And it raises questions around how all cryptocurrency investors treat those assets.
She said she’s had conversations with clients around their cryptocurrency, where access largely comes down awareness of where the keys are.
“That’s for someone who has their own personal holdings but when it’s actually the other end of the scale [where they are conducting an exchange] it does create a huge amount of risk as well,” she said.
“That specific issue (difficulty passing on ownership) will keep happening. When you have the death of anyone, whether it’s the owner, the business owner or whether it’s the ultimate beneficiary, you’re going to have real difficulty with ensuring that the proper ownership can be passed on to others.”
She said it’s a new type of asset and the fact that its users are generally younger means most haven’t thought about their estate either.
As such, there’ll likely be more cases in the next few years. But unless mechanisms are created to pass on these assets, the real troubles will begin in a decade or two as those initial holders age.
“We’re going to have teething issues but I think the problem is going to be that it’s not an issue that’s going to pop up that much nowadays; it’s going to happen in another decade or two. It’s going to be a massive issue unless it’s approached in a good way.”
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