CEO’s warning five years ago resonates now with more than 100,000 customers in light of Quadriga’s current woes.(Photo: Bloomberg)

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

Cotten was interviewed on the “True Bromance Podcast” in February 2014 when he was living in Vancouver, in which the show’s hosts — actors Sage Brocklebank and Michael Karl Richards, and producer Brett Michael — were given a primer on cryptocurrencies and an explanation of his new venture. About an hour in to the rambling discussion, Cotten warned of the dangers of losing passwords needed to access bitcoin.

“It’s like burning cash in a way,” Cotten told his hosts. “Even the U.S. government, with the biggest computers in the world, could not retrieve those coins if you’ve lost the private key. It’s impossible to retrieve those.”

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

Quadriga’s operations have been shuttered and the Vancouver-based firm is reorganizing under court-approved creditor protection with the help of Ernst & Young Inc.

Security solution?

While Cotten, who last resided in Halifax, may have changed his procedures over the years, back in 2014 he was a big fan of protecting 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, which is a string of, a ton of numbers and letters,” he said. “The best way to do it is take your private key, print it off, store it offline in your safety deposit box, vault, whatever, and then take the public key, which is your address, and use that to send money to it. So that way you can never have your bitcoin stolen, unless someone, like, breaks into the bank, steals your safety deposit box and 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 bitcoins that belong to other people who have put them onto our exchange,” Cotten said. “So what we do is we actually store them offline in paper wallets, in our bank’s vault in a safety deposit box because that’s the best way to keep the coins secure.

“Essentially we put a bunch of paper wallets into the safety deposit box, remember the addresses of them,” he said. “So we just send money to them, we don’t need to go back to the bank every time we want to put money into it. We just send money from our bitcoin app directly to those paper wallets, and keep it safe that way.”

Winklevoss twins

Cotten’s measures aren’t unique. Bitcoin advocates Tyler and Cameron Winklevoss, the brothers who run the Gemini Trust Co. exchange, came up with a similar method to store and secure their own private keys using paper, according to December 2017 New York Times story. The brothers cut up printouts of their private keys into pieces and then distributed them in envelopes to safe deposit boxes around the country, so if one envelope were stolen the thief would not have the entire key.

Gemini has since created a high-tech version of the process to hold client money, and accessing the firm’s so-called digital wallets requires multiple signatures from cryptographically sealed devices never linked to the internet.

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

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

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

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