One of the biggest fears of traders happened a few weeks ago on QuadrigaCX, a Canadian cryptocurrency exchange, as funds have been locked out and are now inaccessible to all after its founder, and sole holder of the private keys, died.
Death of the Founder
Last December QuadrigaCX’s founder, Geral Cotten, and his wife went on a trip to India during which the said founder allegedly got sick and was admitted in the hospital after developing life-threatening complications. During his stay he was diagnosed with “septic shock, perforation, peritonitis, and intestinal obstruction”, and after suffering from several episodes of heart malfunction was reported dead on December 9 at 7:26 pm.
While Cotten did prepare a will 12 days prior in which he stated a rather long list of assets going from properties in Nova Scotia to a plane, yacht, and even his two pets chihuahuas and $100,000 for their care, nothing was written about the private keys to the Cold Wallets of the exchanges.
Keys he was the only one to hold. He was also the only one to have the knowledge of where the cold wallets where and how to access/interact with them.
The death of the founder; thus, for all intents and reasons locked the funds present on the cold wallets to everyone, including the clients of the exchange who were entitled to the said funds.
Cold wallets are a type of wallet that are used to store cryptocurrencies offline and thus secure them from online attacks that hot wallets may be subject to.
While cold wallets have clear advantages in regards to security, that also means that extra steps should be taken, as getting back funds from them can prove particularly tricky. Even more so when one does not know the private keys, public keys, reset phrase, nor even simply the location of the said cold wallet as is the case with QuadrigaCX, now that the only person ever responsible for them is no longer with us.
How it Could have been Avoided
The QuadrigaCX case highlights the lack of security and foresight that plagues certain crypto exchanges and should be a lesson to all to not disregard worst case scenarios. Several major cryptocurrency players have come to the forefront to denounce what they see as a lack of professionalism that could have easily been avoided and offered alternatives to this one man holds all strategy.
For example, Bybit uses a cold wallet storage system with the private keys being shared amongst three of the founders and the wallet hardware itself being stored behind several layers of extra security to regulate access. This ensures that funds are kept safe at all times but remain accessible.
When looking for a new exchange to trade on, one of the most important question traders should look out for is: can the exchange safely be trusted with handling my funds? Due diligence is necessary and proper research is necessary for traders when trying to find an exchange that can be trusted, such as Bybit.