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Call it coincidence, terrible luck, or perhaps even evidence of systemic dysfunction across the cryptocurrency industry.
Several customers of QuadrigaCX, the Canadian crypto exchange that went belly up in January, also lost funds on Cryptopia, the New Zealand altcoin factory that recently filed for bankruptcy—on the same day.
Cryptopia experienced a devastating hack on January 14, where it lost $16 million worth of ETH and ERC20 tokens. The exchange immediately went offline and halted withdrawals.
That same day, on the other side of the globe, QuadrigaCX announced the death of its CEO, Gerald Cotten, who had died more than a month prior, on December 9, under bizarre circumstances in India. Crypto and fiat withdrawals on Quadriga had been slow and go for a while, but following the news of Cotten’s death, a number of traders reported withdrawals had completely frozen.
Traders who had coins on both exchanges were hit with a rude awakening.
“The moment I knew that Quadriga wouldn’t let me withdraw my coins, I tried to log into my Cryptopia [account] to withdraw my coins ASAP, so the same thing wouldn’t happen,” said Ida, a Canadian crypto trader who asked that we withhold her last name. “But it was already too late. It got hacked on the same day. Many people I know also had the same experience.”
Two weeks later, Quadriga filed for creditor protection. It is now transitioning into bankruptcy.
Meanwhile, on Monday, Cryptopia announced that it filed for bankruptcy protection in the United States. The exchange had briefly reopened in mid-March, telling customers it was going to issue a 14 percent haircut across the board. But it ended up closing for good on May 15 when it initially filed for bankruptcy in New Zealand.
Why did QuadrigaCX traders also use Cryptopia?
While the fact that both Quadriga and Cryptopia customer funds were lost on the same day is likely nothing more than a strange coincidence, the real link between these two troubled exchanges was the lack of regulatory oversight and similarly lax internal safeguards that ultimately led to ruin.
In its heyday, Cryptopia offered crypto traders a place to diversify their assets into altcoins. At one point, the platform listed approximately 400 altcoins, including gems like BeaverCoin, MileyCyrusCoin, and HoboNickels.
And during the bull market of 2017, altcoins were hopping.
These coins generally have low volume, making them easy targets for organized "pump and dump" schemes. Lured by the promise of easy money, exchanges like Cryptopia that listed a plethora of altcoins gained popularity. But the problem was, you could not buy altcoins directly, because the exchanges that carried them generally could not get proper banking. You had to find an exchange that accepted fiat and buy bitcoin first.
And for traders in Canada, that's where QuadrigaCX came in.
One Quadriga/Cryptopia customer, who asked to remain anonymous, said it was not uncommon to see altcoin gains of 500–1,500% on Cryptopia. Many of the coins listed on the exchange were forks of Bitcoin or token projects that were created before the big Ethereum ICO craze, he said. And many of the coins, such as MonaCoin, LindaCoin, MintCoin and VisioCoin, were “mostly crap and pure speculation.”
Like penny stocks, you could buy hundreds or even thousands of these altcoins for a few dollars worth of bitcoin. He recalled watching how ChainCoin “went from a few cents to over $6.80 USD on one of the largest pumps I’d ever seen in mid-2017 over about four days.”
Lack of KYC and Banking Woes
Cryptopia did not require know-your-customer (KYC) identity checks for withdrawals up to NZ $5,000 ($3,270 USD), so you didn't have to worry about leaving a financial trail behind you.
This policy eventually raised red flags with its bank when, in May 2017, the exchange launched its own stablecoin, NZDT, a cryptocurrency pegged to the New Zealand dollar.
Kiwis could now buy their bitcoin directly on Cryptopia.
The NZ dollar-pegged token took off and, within three or four months, the exchange was transacting up to NZ$1 million a day. In an interview with Newsroom last November, Adam Lyness, Cryptopia’s former director of business development, explained that Cryptopia’s bank, ASB, saw money flying in and out of the company's account and took action: "The bank was worried: what if customers used the bitcoin to do something bad like buy drugs on the black market?” Lyness said.
On December 22, 2017, Cryptopia sent out an email to its customers letting them know that all deposits to its NZDT account were to be halted as a result of ASB telling them that they intended to close its NZDT account on February 9, 2018.
The beginning of the end
Banking problems combined with the bear market took its toll on Cryptopia. The platform started going downhill in 2018. In December 2018, it delisted as many as 70 altcoins that had lost volume or were simply dead.
In Q1 2019, Cryptopia was set to relaunch NZDT. Lyness told Newsroom that Cryptopia had secured the services of a smaller bank, though he did not name the bank. But before that happened, the exchange got hacked into bankruptcy.
Coincidentally, at the same time that Cryptopia was experiencing banking problems, Quadriga was dealing with banking problems of its own. In January 2018, a Canadian bank froze accounts holding CA$27 million in Quadriga funds, ultimately contributing to Quadriga’s demise, after it became unable to process customer cash withdrawals.
QuadrigaCX and Cryptopia both going out on January 14 may be pure happenstance. But one similarity helps to explain their twin fates: both exchanges operated with no regulatory oversight and made up their own rules as they went along.
And when things fell apart, both turned to the traditional legal system to try and fix the financial horrors they left behind.