A judge in Canada will rule in favor of a creditor protection request filed last week by Canadian crypto exchange QuadrigaCX, issuing a 30-day stay of proceedings.
The controversial platform went offline last week, later announcing that it was filing for protection under the Companies' Creditors Arrangement Act (CCAA) due to its inability to locate its "significant cryptocurrency reserves," which may total as much as $137 million (in U.S. dollars). The company sought to preempt any litigation from customers hoping to recoup their losses, according to the filing.
Tuesday's outcome was expected, as financial crimes attorney Christine Duhaime previously explained. She told CoinDesk Monday that she anticipated the exchange would receive the protection, and that professional services firm EY would be appointed as a monitor to oversee Quadriga's processes and procedures over the next several months.
Indeed, EY was appointed as a monitor for the exchange, tasked with helping it locate any assets that can be quickly recovered or sold off to begin reimbursing anywhere from 90,000 to 115,000 customers who had funds locked up in the exchange.
Nova Scotia Supreme Court Justice Michael J. Wood, who is overseeing the case, stated:
"I’m going to issue the order effective today," he later added.
Wood had a few "drafting questions" remaining before finishing the formal order, he said.
Attorneys for the applicants, which include QuadrigaCX and EY, now have five days to serve the 115,000 customers owed funds with notice of the order.
Initially, EY will handle communications, an attorney explained.
The bulk of Quadriga's missing funds are said to be in cold wallets, offline storage commonly used as a security precaution against hacks and thefts. When the exchange's founder and CEO Gerald Cotten died of Crohn's disease in December, he reportedly took all knowledge of the exchange's private keys with him.
An initial EY filing said the company would have to focus on determining whether there are any reserves in cold storage, and how to access them. On Tuesday, a representative for the firm explained that the company would set up a wallet to store any coins that are recovered.
While Cotten's widow, Jennifer Robertson, has already hired one security expert to try and crack an encrypted laptop Cotten reportedly worked off of, an attorney for Quadriga explained that it was being moved to his office and would be sent on to EY.
"We still think there is a significant amount of cryptocurrency, totaling up to $180 million [CAD] floating around out there that we haven’t found," he said.
It remains unclear how successful the company may be at locating Quadriga's reserves.
Maurice Chiasson, a partner with Canadian law firm Stewart McKelvey, also noted that payment processors hold some significant amount of Quadriga's funds, primarily in the form of cash and cash equivalents. Chiasson is representing QuadrigaCX at present.
These payment processors do not have bank accounts, largely because banking institutions are hesitant to work with cryptocurrency companies, he said.
One processor, Billerfy, has some $25 million [CAD] in its possession, but because the company has no bank account, it cannot cash out bank drafts.
Another processor maintains about $5 million, he added.
"There is a need for some sort of process. Is there something under the broad remedial powers of the [CCAA] that provides a solution. No one's disputing ... that a significant chunk of this belongs to Quadriga and they just can't access it," Chiasson said. "Those funds will be of tremendous importance."
During testimony, Wood pushed back on a number of aspects of the affidavit filed by Quadriga, asking for clarification on certain points and highlighting certain flaws that he saw on others.
His first major point of contention revolved around notice issued to creditors and stakeholders. As Chiasson explained, due to the "urgent" nature of the filing, notice was not provided to the majority of creditors, though he added that a note was published to the exchange's website and internet forums shared information about the filing shortly thereafter.
Wood noted that issuing a stay of proceedings order without creditors receiving formal notice was typically not granted, "even under CCAA filings. This is a very unusual request."
However, attorneys claiming to represent potential creditors said they did not oppose the order, clearing the way for Tuesday's approval.
The Justice also took issue with an early argument made by Chaisson, which indicated that his firm may maintain a wallet to store recovered coins. Wood pointed out that this may present a conflict for Chaisson or his firm by making them active participants in the proceedings. EY's decision to maintain the wallet resolved this.
Still, other arguments pertained strictly to the written word.
"How many different paragraphs does someone have to look at to know what 'property' is?" he asked (the answer, from Chiasson, was two or three).
Nova Scotia Supreme Court image by Nikhilesh De for CoinDesk
CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.