Canada’s Coinsquare is the latest cryptocurrency exchange to experience unscheduled ‘downtime’ during a ‘crypto’ crash, further underscoring the need for customers to maintain personal custody of their digital assets.
On Tuesday, Coinsquare’s official Twitter feed announced that the site was investigating “a technical issue” that resulted in a halt to digital asset transactions. The issue was “resolved” later that day, with the site blaming “a technical issue with our hot wallet systems” for the hiccup. Despite this assurance, some customers continued to experience disrupted service as of Wednesday morning and the site reported “minor delays” for withdrawals that evening.
The prominent ‘crypto’ critic known as Bitfinex’ed offered their own theory regarding Coinsquare’s outage: “Translation: We loaned out your bitcoins to market fakers so that they can trade against your interests, until they pay us back we have to pause withdrawals while lying to you about the problem.”
Coinsquare swiftly replied to this speculation, insisting that the exchange “does not lend out coins. All user assets are held in cold storage with qualified custodians and are never used to execute or settle trades. Coinsquare’s independent regulated custodian partners Tetra Trust and Coinbase Custody offer a combined $470M in insurance for customer assets.”
It’s worth noting that both Coinbase Custody and Tetra Trust share DNA with U.S. exchange Coinbase (NASDAQ: COIN), which filed a notice Tuesday with the U.S. Securities and Exchange Commission (SEC) indicating that its customers “could be treated as our general unsecured creditors” in the event of a bankruptcy proceeding. As such, Coinsquare’s ‘all is well’ assurances may not have helped its customers sleep any better.
Burying your gold under someone else’s house
The suggestion that digital currency exchanges would play fast and loose with customer funds is hardly new but the discussion of which is increasingly becoming more mainstream. Exchanges commonly go offline when prices are crashing and never when prices are “mooning.” It only seems to happen when anxious customers seek to convert their speculative crypto tokens into fiat currency while they’re still worth something.
These technical outages are now so routine that they barely summon outrage. Outages occur even at the largest exchanges that earn huge commissions during ‘crypto’ bull runs yet somehow never manage to upgrade their systems to handle the panicked dumping that inevitably follows. Predictably, these outages occur with far less frequency when customers are trying to get money onto exchanges so they don’t miss out on the latest pump.
So why would an exchange crash during downward surges but not during upward surges of similar volume? An increasingly popular theory is that the exchanges aren’t keeping customer deposits separate from their operating capital—possibly by loaning it out to market makers in order to garner a nice return on those otherwise dormant funds—and don’t have enough liquid assets on hand when withdrawal requests spike.
In March, SEC chairman Gary Gensler warned investors that by leaving their funds on the exchanges they were effectively making unsecured loans to these companies. Just this week, Gensler told Bloomberg that some major platforms are “trading against their customers often because they’re market-making against their customers.”
At this point, there’s no evidence that Coinsquare is guilty of anything beyond temporary technical ineptitude. But given the level of chicanery that the crypto community has endured this week—and the carnage appears far from over—we may soon get a glimpse at how many companies in this space have been, as Warren Buffett so eloquently put it, swimming naked.
Coinsquare is based in Toronto and the scandalous implosion of its Canadian rival QuadrigaCX a couple years back has allowed Coinsquare to come off looking good simply by continuing to operate. But that’s not to say that Coinsquare has kept its nose entirely clean since its 2014 launch.
In July 2020, the Ontario Securities Commission (OSC) reached a settlement with Coinsquare and three top execs—founder Virgile Rostand, CEO Cole Diamond and (ironically enough) chief compliance officer Felix Mazer—after learning that the exchange had used 840,000 individual wash trades to fake over 90% of its trading volume between July 2018 and December 2019.
OSC enforcement director Jeff Kehoe said at the time of the settlement that “despite several employees raising concerns about inflated trading volumes, Coinsquare not only stuck with the practice, but lied to investors about it and retaliated against a whistleblower. Being an innovator in our capital markets is not a free pass to disregard Ontario securities law.”
That same year, Coinsquare was revealed to be the victim of a hack that resulted in nearly 4,000 users’ data being compromised, with the hackers telling Vice that they planned to use the details to implement SIM swapping attacks. Coinsquare later revealed that it had known of “a possible data breach” 18 months before someone other than Coinsquare made the news public. Coinsquare initially blamed a former employee but later acknowledged that “it’s possible that our [customer relationship management] provider was hacked.”
Vancouver-based fintech outfit Mogo (TSE: MOGO) holds 39% of Coinsquare and has options to extend that stake to an outright majority. Mogo is also an investor in Coinsquare’s crypto custodian Tetra Trust and holds a 25% stake in the Toronto-based NFT Trader platform.
Paying the piper, calling the tune
Coinsquare was not in the original group of exchanges that colluded to ‘delist’ Bitcoin Satoshi Vision (BSV) in mid-2019. However, Coinsquare disabled BSV deposits and withdrawals in August 2021, then in October announced that the exchange would officially delist BSV as of November 2.
Coinsquare’s disabling notice was posted shortly after the BSV network underwent a concerted attack by parties unknown seeking to seize control of the blockchain for nefarious purposes. The attack was successfully repelled by honest BSV nodes, but this emphatic demonstration of how blockchains maintain their integrity apparently wasn’t enough to cause Coinsquare to rethink its delisting decision.
Interestingly, the BTC blockchain suffered a successful double-spend attack earlier that same year, yet Coinsquare (nor any of the other anti-BSV exchanges) didn’t react by blocking its customers from playing in the BTC sandbox. Presumably BTC wasn’t banned because Coinsquare realized that its bottom line would suffer if it stopped reaping commissions on BTC trades during the 2021 mega-bubble.
It’s worth noting that, at the time, Coinsquare claimed that its delisting hand was forced because “our custodian and liquidity partners have ended support for BSV.” Remember, that would be the same custodians linked to Coinbase, which never listed BSV in the first place. In fact, Coinsquare’s disabling of BSV deposits and withdrawals came exactly one month after Coinbase Ventures participated in Tetra Trust’s seed funding round.
Coinbase (along with Kraken, another anti-BSV exchange) is a member of the Crypto Open Patent Alliance (COPA), which is suing BSV supporter—and Bitcoin inventor—Dr. Craig Wright to block his copyright claim in the Bitcoin white paper. COPA filed its suit against Wright in April 2021, just a few months before Coinbase invested in Tetra Trust and Coinsquare joined the list of exchanges that purged BSV from their platforms.
With unmatched transaction capacity and ultra-low transaction fees, BSV is the only protocol that remains true to the Bitcoin white paper’s vision of peer-to-peer electronic cash. It is designed to advance utility, not to earn commissions for exchanges by facilitating traders’ never-ending search for greater fools. So perhaps the exchanges that treat BSV like an unwanted house guest do have some fiscal justification for their censorial stance. But that still doesn’t make it right.