For years, cryptocurrency owners have focused on coin security. Many of our clients protect their coins and accounts from online hackers through offline storage and complex passwords that are memorized but never written down. A recent Canadian bankruptcy filing reminds us how important it is to record and share passwords. By recording and sharing their passwords, our clients allow their loved ones and advisors to access their coins and online accounts when necessary.
A Sudden Death
Canadian Gerry Cotten formed the online cyptocurrency exchange Quadriga in 2013. Quadriga was a software platform for exchanging coins and currency worldwide. Although Quadriga had hundreds of thousands of users, Gerry personally managed the company. Most importantly, he personally managed all of Quadriga’s coins. To avoid losing coins to hackers, Gerry held the majority of the company’s coins in offline "cold wallets." He would manually transfer coins back into Quadriga’s online account or “hot wallet” as needed to allow users to make withdrawals. All of this seemed to be working until Gerry died suddenly on Dec. 9, 2018, at age 30, apparently of Crohn’s disease. One month later, Quadriga’s access to cash was frozen due to a bank overdraft, so Quadriga couldn’t meet the demand for cash payments from its users. Meanwhile, Gerry’s widow hasn’t been able to access his cold wallets, so Quadriga also can’t meet the demand for coin withdrawals from its users. On Feb. 5, 2019, the Supreme Court of Nova Scotia issued an order freezing further litigation against Quadriga until March 7 to allow it more time to find its virtual coins.
No Access to Critical Data
Gerry’s widow has filed a sworn affidavit with the court in support of Quadriga’s bankruptcy filings. She says she’s turned over Gerry’s personal computer, laptop and an encrypted USB drive to a professional security specialist with the hope that he can access any coins stored on those devices. Apparently, strong passwords and encryption can provide effective security, because, as of Jan. 30, the security specialist hadn’t yet been able to access the data on Gerry’s laptop or USB drive. Similarly, a minority shareholder of Quadriga reported to the court that he’d tried without success to access Gerry’s encrypted email account.
Lessons Learned
Estate planners and financial advisors can take several lessons from this case. Most importantly, we must advise our clients to record their usernames and passwords to allow access to their accounts if they die or lose capacity. Even a concussion or temporary memory loss could have devastating consequences for a client who relies entirely on memorized passwords to access valuables.
Just recording usernames and passwords may be enough when coins are located in cold wallets, offline. For online assets and accounts, our clients also should have durable powers of attorney and wills that give their trusted agents and representatives power over their digital accounts. Online accounts and emails can be essential to trace digital activity. Access to an online account is governed by the provider’s licensing agreement. For essential accounts, users may refer directly to their user license with a particular provider to ensure that their agents and representatives can access their account when necessary. As a general safeguard, express digital powers in wills and durable powers of attorney are important.
Finally, the filings in this case offer valuable insight into the world of virtual exchanges. The Quadriga platform was owned and managed by one individual who personally held all of the company’s assets. Gerry’s use of personal accounts was necessary because no bank would allow Quadriga to open accounts in the company’s name. Quadriga relied on third parties to conduct cash exchanges. The company’s cash operations consisted of wires and other transfers between Gerry’s individual accounts and those third parties. The extent of Gerry’s control over Quadriga may not have been publicly available until these court proceedings became public. However, following this and other exchange failures, cryptocurrency owners may consider looking as deeply as possible into the structure and finances of any exchange platform they use.
The Quadriga case provides a fascinating look into the world of virtual currency. A thoughtful review of what went wrong at Gerry’s death can help us to protect our clients, and their loved ones, from loss.
