Top law firms will meet this Valentine’s Day on a Halifax courtroom, competing for a piece of the CAD$260 million ($196 million) in Bitcoin and other digital assets owed by the Quadriga CX cryptocurrency exchange to its customers. On Thursday, these firms will represent the exchange’s 115,000 users and appear before the Nova Scotia Supreme Court.
Prehistory to The Exchange’s Misfortune
Quadriga CX used to be one of Canada’s largest cryptocurrency exchanges until its 30-year-old CEO Gerald Cotten suddenly died. There are still numerous rumors around this death which led to $150 million of users’ funds becoming inaccessible. Its customers became victims of this situation and trying to find the most sensible way to compensate them, lawyers were considering selling the exchange.
QuadrigaCX asked for a 30-day stay of proceedings, which will end on March 7. However, the exchange suffered a new misfortune. It lost nearly $370,800 (CAD $468,675) by mistake. As we have already reported, QuadrigaCX accidentally transferred more than 100 Bitcoins to a storage wallet that is currently inaccessible. As a result, the remaining funds of the exchange included 51 BTC, 33 BCH, 0.014 BHC SV, 2,000 BTG, 800 LTC, and 950 ETH.
The addresses that received multiple small transfers had not seen any transactions since April. Laurent, a developer at OXT, commented:
“These addresses are automatically clustered thanks to a script processing a conservative version of a method called the ‘merged inputs heuristic’. In its basic version, the ‘merged inputs heuristic’ states that all addresses associated to the inputs of a bitcoin transaction are controlled by [the] same entity and should be clustered.”
The court-appointed monitor Ernst and Young (EY) took control over the exchange’s funds and the electronic devices that were used by Cotten. Among them, there are laptops, smartphones, and encrypted USB keys. Moreover, EY tried to collaborate with some third-party payment processors in order to get access to the fiat balances of the exchange, but they still haven’t managed to succeed. That’s why the question of how customers will be compensated still remains unclear.
The Intense Competition
As Bloomberg reported, Bennett Jones LLP and McInnes Cooper were first to submit a request to represent users, with retail investor Tong Zou claiming he was “one of the largest affected individual users”. Miller Thomson with Cox and Palmer and Osler, Hoskin and Harcourt with Patterson Law have filed submissions as well.
Goodmans LLP has filed not an official notice, but a letter to the Nova Scotia Supreme Court to ask to be appointed representative counsel as well. The firm is calling for a creditors’ committee to be formed to help select representative counsel first.
Each competing firm will have to explain to the judge Michael Wood why they should be appointed as a representative counsel. Bennett Jones and McInnes Cooper said that they already have experience in recovery issues and mentioned fraud and ponzi scheme investigations as examples. They believe they will be able to properly investigate the Quadriga case.
Ernst and Young (EY) that has been appointed as a monitor for the exchange said that usually, law firms do not become representative counsel in a creditor case. EY explained:
“In those cases, the Courts considered the underlying experience of the proposed counsel, as well as considering which law firm proposed to represent the most inclusive class of claimants and how many claimants have already retained that firm to represent them.”
According to EY, the representative counsel should be specifically tasked with communicating with creditors and advocating on their behalf over any issues that might appear.
“It may be appropriate to temporarily limit the mandate of Rep Counsel appointed at this time to communicating and disseminating information to the Affected Users and advocating on behalf of Affected Users before the Court on preliminary issues raised in these CCAA proceedings.”
They further said:
“The reasonable fees and expenses of representative counsel, as well as financial and other advisors, are frequently funded by the CCAA debtors’ estates. In such cases, the Courts frequently grant the representative counsel a charge to secure its fees and disbursements.”
Each participant is suggesting their own ideas on how to run the case and find a solution. It deals with cryptocurrencies, that’s why the situation is even more compounded.
Christine Duhaime, a financial crimes lawyer, said:
“The process should be opened up for more large firms with digital currency expertise to present proposals.”
Hopefully, the Supreme Court will bring some clearness to the case today.