On Tuesday, February 17, the Canadian Bitcoin community was surprised to learn that its biggest and longest-serving exchange, CAVIRTEX, was to wind down operations by March 25. Enter QuadrigaCX, heir apparent to the title of Canada’s largest Bitcoin exchange.
An older version of the CAVIRTEX database, including 2FA secrets and hashed passwords, may have been compromised. Their website states, “We believe that damage to the company’s reputation, caused by the potential compromise, will significantly harm our ability to continue to operate successfully.” Kyle Kemper, VP of CAVIRTEX, also cited a difficult banking relationship as a contributing factor.
CAVIRTEX was the second exchange to go down in Canada this year; Vault of Satoshi also declared its intent to close as of February 5th, 2015.
“We’ve definitely seen an increase in new accounts over the past few days,” said Gerald Cotten, CEO of QuadrigaCX. He added that the closure of CAVIRTEX came as a “total surprise” to him. Like everyone else following the Bitcoin news in Canada, he knew about some of CAVIRTEX’s difficulties, but didn’t think they were serious enough to close the company. “Security and banking issues…come with the territory when one operates an exchange,” he said.
Can QuadrigaCX avoid a similar fate?
Cotten places his faith in the company’s security system. QuadrigaCX clients’ passwords are encrypted both server-side and client-side, on-site and in-browser. Even if someone managed to hack in and steal their password hashes, as in the case of CAVIRTEX, those hashes would be useless to the thief.
“Total security is incredibly hard to achieve,” Cotten said. “You make one little mistake and a hacker can and will exploit it. Banks can’t guarantee they won’t get robbed; exchanges can’t guarantee they won’t get hacked. That’s why we keep as little [bitcoin] online as possible.” The rest of the funds are kept in cold storage. Cotten added that QuadrigaCX participates in the Bug Bounty program run by Crowdcurity, so their system is continuously being tested for weak points of entry.
As for its banking relationships, QuadrigaCX appears positioned to keep legacy banks onside. When it comes to banks, said Cotten, an exchange is “always walking on eggshells.” Before its launch on December 26, 2013, QuadrigaCX registered with FINTRAC as a money services business, becoming the first exchange to do so in Canada. While it isn’t strictly required by law, such registration is perceived by banks as a sign of legitimacy, and registration has minimized the number of banking issues the exchange has had to face. QuadrigaCX was also the first Canadian exchange to integrate INTERACTMOnline.
It also helps to have a little luck. Just before it was thrust into the spotlight, QuadrigaCX began a global marketing campaign to expand its business outside of Canada, targeting more international markets. At the moment, it carries CAD/BTC, USD/BTC and Gold/BTC order books, and accepts clients from most countries around the world. Due to regulatory complexities, however, QuadrigaCX does not accept U.S. clients.
As for the prospect of other foreign exchanges encroaching on the Canadian Bitcoin space, Cotten isn’t worried. He points out that Bitstamp and Bitfinex are already active in Canada, but he doesn’t foresee too many other companies making a push into the Canadian market. “Trading volume is still very low [here],” he says. “It’s not really worth it for them.” And Canadians who might try to migrate toward foreign exchanges are likely to find the process too complicated and expensive by comparison.
To see a recent, in-depth interview with Gerald Cotton, and learn more about QuadrigaCX, visit decentral.tv. For this episode of Decentral Talk Live, Cotten spoke with host Ethan Wilding and guest host Hai Nguyen shortly before the CAVIRTEX announcement.
Christie Harkin is the contributions editor at Bitcoin Magazine.