CEO's warning five years agoresonates now with more than 100,000 customers in light ofQuadriga's current woes.(Photo: Bloomberg)

(Bloomberg) –Quadriga CX founder Gerry Cotten died in Decemberpossibly holding the only keys to C$190 million ($143 million) incryptocurrencies — but five years ago, herevealed exactly how his digital exchange stored bitcoin for its clients.

Cotten was interviewed on the “True Bromance Podcast” inFebruary 2014 when he was living in Vancouver, in which the show'shosts — actors Sage Brocklebank and Michael Karl Richards, andproducer Brett Michael — were given a primer on cryptocurrenciesand an explanation of his new venture. About an hour in to therambling discussion, Cotten warned of the dangers of losingpasswords needed to access bitcoin.

“It's like burning cash in a way,” Cotten told his hosts. “Eventhe U.S. government, with the biggest computers in the world, couldnot retrieve those coins if you've lost the private key. It'simpossible to retrieve those.”

The warning resonates now with more than 100,000 customers inlight of Quadriga's current woes. Cotten, who ran Quadriga off his laptop,died while traveling in India, and no one knows how to recover thecryptocurrencies the exchange was holding for clients.

Quadriga's operations have been shuttered and theVancouver-based firm is reorganizing under court-approved creditorprotection with the help of Ernst & Young Inc.

Security solution?

While Cotten, who last resided in Halifax, may have changed hisprocedures over the years, back in 2014 he was a big fan ofprotecting cryptocurrencies with a very low-tech solution:paper.

“The paper wallet is a great way to store your bitcoins.Basically, all you need to send bitcoins is your private key, whichis a string of, a ton of numbers and letters,” he said. “The bestway to do it is take your private key, print it off, store itoffline in your safety deposit box, vault, whatever, and then takethe public key, which is your address, and use that to send moneyto it. So that way you can never have your bitcoin stolen, unlesssomeone, like, breaks into the bank, steals your safety deposit boxand gets into your private key and so forth.”

And that's exactly what he did for his firm in those days.

“At Quadriga CX, we're obviously holding a bunch of bitcoinsthat belong to other people who have put them onto our exchange,”Cotten said. “So what we do is we actually store them offline inpaper wallets, in our bank's vault in a safety deposit box becausethat's the best way to keep the coins secure.

“Essentially we put a bunch of paper wallets into the safetydeposit box, remember the addresses of them,” he said. “So we justsend money to them, we don't need to go back to the bank every timewe want to put money into it. We just send money from our bitcoinapp directly to those paper wallets, and keep it safe thatway.”

Winklevoss twins

Cotten's measures aren't unique. Bitcoin advocates Tyler andCameron Winklevoss, the brothers who run the Gemini Trust Co.exchange, came up with a similar method to store and secure theirown private keys using paper, according to December 2017 New YorkTimes story. The brothers cut up printouts of their private keysinto pieces and then distributed them in envelopes to safe depositboxes around the country, so if one envelope were stolen the thiefwould not have the entire key.

Gemini has since created a high-tech version of the process tohold client money, and accessing the firm's so-called digitalwallets requires multiple signatures from cryptographically sealeddevices never linked to the internet.

Cotten explained in the podcast that his early measures left thecrypto cache safe even if hackers got into his site.

“It'll be a little annoying because we'll have to clean upwhatever mess the hackers make, however they won't actually be ableto steal any of the funds,” Cotten said, adding that while theycould “see the address of where the coins went” hackers couldn'tactually access it.

Now it's up to the court appointed monitor to attempt to unravelthe current mess, whether the keys are stored on paper as Cottenmentioned years ago or in more elaborate forms.

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