All About Estates

A Cautionary Crypto-Tale

My fellow blogger Maureen Berry and colleague Demetre Vasilounis, Student-at-Law, recently blogged about a form of digital assets that has received limited treatment in Canadian estate law commentary, namely digital assets that continue to generate revenue after the death of the owner, such as the YouTube and Twitch “Partner” programs.

To the above we can now add a further consideration to the world of estate planning for digital assets, that of the owner of the digital platforms themselves. There has been a flurry of media reports over the past two weeks surrounding the death of Gerry Cotten.[1] Mr. Cotten was the founder of QuadrigaCX, a Vancouver-based cryptocurrency exchange described as one of Canada’s largest. According to reports, Mr. Cotten died suddenly in India on December 9, 2018 from complications arising from Crohn’s disease, although the company did not announce the death for more than a month after he died.[2]

In January 2019, Quadriga filed for creditor protection in the Nova Scotia Supreme Court under the federal Companies’ Creditors Arrangement Act (CCAA). The court issued an initial order on February 5, 2019, prompting increased media attention. According to reports, Mr. Cotten’s death has led to a range of speculation among conspiracy theorists on social media platforms, some going so far as to contend that Mr. Cotten is actually alive, having faked his death. To be clear, those reports are firmly in the realm of online speculation, with no actual evidence having been produced. In her affidavit filed as part of the CCAA proceeding, Mr. Cotten’s widow and a co-owner of the business, Jennifer Robertson, describes how she has been the target of threats and what she describes as slanderous comments.[3]

What is the reason for all this?

The problem arises in part from one of the strengths of cryptocurrency, namely its security. A significant amount of Quadriga’s cryptocurrency is held in “cold wallets”, a term I had not heard until this story made headlines. According to Quadriga’s website, which now features only a statement and “Q & A” from the company regarding its CCAA application:[4]

Q: Why can’t you access the coins in the cold wallets?

A: Cold wallets, by their nature, are highly encrypted and were kept off the QuadrigaCX server for security reasons. Gerry took sole responsibility for the handling of funds for QuadrigaCX and as such no one other than him can access the coins in the cold wallets.

It also states:

Q: Why are you filing for creditor protection?

A: Once it was apparent that we could not access the significant cryptocurrency reserves held in the cold wallets required to satisfy customer cryptocurrency balances on deposit, nor obtain the funds to settle customer currency withdrawal requests, we made the tough but necessary decision to file for creditor protection.

In addition, Ms. Robertson stated in her CCAA affidavit that Mr. Cotten ran the business through an encrypted laptop and she does not have the password or the recovery key.[5]

With up to $250 million in cryptocurrency that seemingly cannot be accessed (it remains unclear what portion of that amount is held in the cold wallets), owners of the cryptocurrency must now participate in the CCAA proceeding in the hopes of recovering some part of their holdings. It has been reported that the largest user of Quadriga’s platform has $70 million in cryptocurrency.[6]

This story is a particularly stark example of why succession planning for a business, irrespective of the age of the principal, is crucial both to the long-term success of the business, but also to avoid leaving the executors of the business owner’s estate with a host of problems to manage. If the wrong executors are appointed, they can easily make a bad situation that much worse. Of course, it is not only an unexpected death that can lead to this type of situation. Business owners, particularly those with voting control of the business, must also pay careful attention to their choice of attorney for property to ensure that in the event of incapacity, which, like death, can be sudden and unexpected, appropriate persons are appointed to exercise the owner’s shareholder rights.

It will be interesting to see how this unfortunate story unfolds.

[1]       Higgins, Michael, “A sudden death, an encrypted laptop and the missing wallets with $250 million worth of crypto currency”, National Post, February 5, 2019, pp. A1, A2.

[2]       Higgins, p. A2.

[3]       Higgins, p. A1, A2.

[4]       https://www.quadrigacx.com/

[5]       Higgins, p. A2.

[6]       Higgins, p. A2.

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About Darren Lund
Darren Lund is a member of the Trust, Wills, Estates and Charities at Fasken, Toronto office. Darren has expertise in a broad range of estate planning matters, including multiple wills, inter vivos trusts, disability planning, estate freezing, and planning for beneficiaries and assets outside Canada. Darren advises trustees and beneficiaries on all aspects of estate administration, both contentious and non-contentious, and his experience includes passing of fiduciary accounts, trust variations, post-mortem tax planning, and administering the Canadian estates of non-residents. He also speaks and writes on a variety of related topics such as estate planning for spouses and couples, inheriting overseas property and estate planning for persons with disabilities. He previously practised estates law at a large national law firm. Email: dlund@fasken.com

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