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Crypto's Most Controversial Exchanges

Posted on 8/16/2021 by Robert

Having covered the incompetent, the corrupt, and the downright criminal in Crypto’s Most Controversial Projects, Unmask Crypto now turns its attention to exchanges. If you thought we had hit peak stupidity with our previous effort, you ain’t seen nothing yet. If insanity could be measured on a metric scale, then we estimate that this would climb somewhere north of over 9,000. Those levels shouldn’t even be possible. 

Mt.Gox

There was a time, from 2013 to early 2014, when Mt.Gox was handling 70% of all bitcoin transactions worldwide – around 150,000 BTC a day. In itself, that’s incredible. More incredible is that during that period Mt. Gox was losing a significant number of bitcoin through theft, and it was occurring right under their noses. By the time Mt Gox declared insolvency in February of 2014, 850,000 bitcoin had vanished, with a value of around $450 million. Today, the dollar value of that lost crypto would be $40 billion.

Research would show that the theft of bitcoin had begun as early as 2011, with the crime going undetected for years. When the exchange collapsed, Japanese authorities swiftly moved in. CEO Mark Karpeles was arrested and charged with embezzlement of funds and falsifying data. In the end, Karpeles was acquitted of the more serious charge of embezzlement. He was found guilty of falsifying data to mislead investors, and received a four-year suspended sentence

The question of the missing bitcoins was therefore unresolved. Where had those 850,000 BTC gone? The answer to that question may seem bizarre at first, but when you delve a little deeper, it becomes far, far stranger than that. The prime candidate for ransacking Mt.Gox was Alexander Vinnik, the founder of BTC-e.

BTC-e

BTC-e was founded in 2011 by Alexander Vinnik and Aleksandr Bilyuchenko, swiftly gaining popularity in the Russian-speaking world. In 2017 Vinnik was arrested in Greece at the request of US authorities. The US accused him of hacking, fraud, identity theft, tax refund fraud, public corruption, drug trafficking, and laundering $4 billion. Among that $4 billion of criminally acquired cryptocurrency were believed to be the 850,000 missing bitcoin stolen from Mt.Gox.

Vinnik certainly had the skills and connections necessary to pull off such a crime. He was believed to be behind the ransomware ‘Locky’ and the cyber criminal group ‘Fancy Bear’ which hacked computers belonging to the US Democrat Party and also had ties to BTC-e.

The US began extradition proceedings against Vinnik, as did Russia and France. In the end it was France who took the first shot, although he almost didn’t make it. While in Greek custody, Vinnik was the subject of an assisination plot believed to be connected to the Russian criminal underworld. Vinnik is currently in France serving a 5-year prison sentence for fraud, but don’t be surprised if his term ends with a fresh round of extradition orders.

After the arrest of its founder, BTC-e attempted to put its past behind it and rebranded as Wex, and then tried to put Wex behind it in an exit scam. Wex co-Founder Alexei Bilyuchenko later went on to claim that the money from Wex was transferred into the hands of the KGB’s successor organization, the Federal Security Service (FSB). 

Another Wex co-Founder, Dmitri Vasilev, sold the site to Dmitri Khavchenko, a member of the paramilitary organization believed to have shot down Malaysia Airlines Flight 17 which killed 298 people. Khavchenko is also connected to the Russian billionaire Konstantin Malofeev, who has been accused of funding and supporting pro-Russian cessationists in Eastern Ukraine. 

Even with everything we do know, the questions which still surround Mt.Gox and BTC-e are compelling. Were the missing Mt.Gox bitcoins used to fund terrorist activity? Is BTC-e the only thing that ties billionaire Malofeev and the FSB together? Could Malofeev, Khavchenko or someone in their social circle have been behind the assasination plot against Vinnik? Whatever the answers, it seems that there are plenty of people who have good reason to ensure that Vinnik never falls into US custody.

Cryptsy

Paul Vernon, the CEO of Cryptsy, claims the company which he ran lost the majority of its money when the exchange was hacked. His wife claims that Vernon was leading a double life, with a second family, spending vast sums of money. Veron claims his wife was complicit in his crimes. 

In the end, Vernon liquidated $8 million of customers’ money through Coinbase and disappeared. For their part in facilitating the crime, Coinbase later settled the lawsuit and paid out damages of $1 million.

QuadrigaCX

Founded in 2013, QuadrigaCX was at one time thought to be Canada’s largest exchange. Despite its size, Quadriga was managed by one man alone, Gerald William Cotten. He ran the entire company from a Macbook Pro and used spreadsheets rather than accounting software to track the millions – and billions – which passed through the business. 

In December 2018, while on honeymoon in India, Cotten died of complications from Crohn’s disease, a type of inflammatory bowel disease which can cause anything from minor to severe issues along the digestive tract.

It was then the public became aware of Cotten’s near limitless incompetence. Cotten had stored much of the money that came to Quadriga in cold storage wallets and kept no record of how to retrieve any of the money. In total $250 million was missing. When accounting firm Ernst & Young investigated Cotten’s dealings they further discovered that he operated accounts on other exchanges and was heavily involved in margin trading – without recording success. Cotten had gambled huge sums of money on risky trades and lost even more trying to recover the losses. 

Before the end of his life Cotten must surely have realised that the end for QuadrigaCX was in sight. Had this then prompted him to fake his own death abroad? It’s a theory that seems unlikely, but just plausible enough to niggle in the back of the mind and take root. Perhaps Cotten’s death was just the final con in an exit scam called life, or perhaps he simply shat himself to the grave.

Cryptopia

Some exchanges are hacked. Some are liquidated. Some fall victim to inside jobs. Few exchanges are careless enough to be hacked while being liquidated, and robbed by employees too. Cryptopia would tick every box, if only its owners could be trusted enough to tick boxes properly. After a $30 million hack which befell the company in 2019, the New Zealand altcoin exchange was hacked once again even while liquidators were wrapping up the firm. The exchange was also subject to a $182,000 theft perpetrated by a member of staff. Utterly pathetic.

BitMEX

If crypto were ever to look for an Emperor God-King it could do worse than Arthur Hayes, the man who co-founded BitMEX in 2014. Hayes is the kind of testosterone-rich turbo-alpha women want to be with, and men want to be with. Not because they’re gay, but because they’re Hayes-curious. If there were ever a toplist of the biggest chads in crypto, Hayes would be #1, #2 and #3 – even though that’s not how toplists work. 

Following arrest, he is currently out of prison on a $10 million bond, facing charges of breaking the bank security act. Fellow BitMEX employees including Ben Delo, Samuel Reed, and Gregory Dwyer are also named in the case which accuses the company of not doing enough to prevent money laundering. The trial is set for March 2022.

Bitfinex

Bitfinex exchange created Tether, the most popular stablecoin in the cryptosphere. This has proved to be a hugely successful endeavour for the firm, but also highly controversial. Bitfinex was founded by pyramid scheme devotee Raphael Nicolle. According to one blogger, Nicolle used code ‘stolen’ from the previously defunt Bitcoinica – although in crypto we generally prefer to use the term ‘forked’ thank you very much.

In its early days Bitfinex had some sensible security features such as read-only wallets, and less safe sensible security features such as holding half their money on Mt.Gox. Of course, Bitfinex has since learned its lesson and would never deal with such dodgy operators these days.

In April of 2019, NY prosecutors alleged $850 million of Tether funds were used to cover Bitfinex losses. The loss had apparently stemmed from payment processor Crypto Capital refusing to release Bitfinex funds to the exchange. In the end, the head of Crypto Capital, Ivan Manuel Molina Lee, was arrested on money laundering charges. Tether and Bitfinex have since settled the case with the NY attorney general, agreeing to pay a $18.5 million fine without admitting any wrongdoing.

Binance

Binance is the top exchange in the world today. As such it is a nexus point for the good and ills of the cryptosphere. Yes, they’ve been hacked to the tune of $40 million bitcoin. Yes, they’ve had issues with regulators across the world including in the US , Japan and the UK . Yes, they fled China and relocated to Malta – and for a while they didn’t even have an official headquarters.

“Bitcoin doesn’t have an office,” Changpeng Zhao, the Binance CEO, told Laura Shin when questioned at ConsenSys in 2020. “Wherever I sit is going to be the Binance office. Wherever I need somebody is going to be the Binance office.”

It’s the sort of statement you could almost imagine Gerald Cotten making as he bashed around on his Macbook Pro dabbling on his spreadsheets. Of course, that was in the bad old days. That sort of thing could never happen again, r-right?