A crypto exchange’s missing keys concealed a much bigger problem

How an Exchange Can Show Money It No Longer Has

A crypto exchange is more than a place to buy and sell coins. It also keeps an internal record of what each customer is owed. When a customer logs in, the displayed balance may come from that record—not from a separate, individually labeled pile of cryptocurrency waiting in a wallet.

That arrangement is convenient: the exchange can update its books quickly as customers trade, instead of moving coins on a blockchain for every transaction. But it creates a crucial distinction. A balance is a claim against the exchange; it is not proof that the exchange holds matching assets.

The Gap Between the Ledger and the Wallet

To meet withdrawals, an exchange needs access to assets held in its wallets or other accounts. If those assets are lost, inaccessible, or depleted, the internal ledger can still show customers the amounts they are owed. The screen may look unchanged even as the resources behind those claims shrink.

In QuadrigaCX’s case, the story of inaccessible wallets after founder Gerald Cotten’s death offered a seemingly simple explanation for why customers could not recover their funds. Ontario securities investigators later attributed the collapse to fraud, including trading losses covered with other customers’ deposits. That points to a deeper failure than a password problem: customer deposits were not merely trapped behind a locked door; funds had also been used to cover losses.

Why the Password Story Was Not Enough

If an exchange’s records and assets are not independently checked against each other, customers have little way to tell whether the displayed balances are fully backed. A company can continue recording what it owes while the pool of assets available to pay those claims falls short. New deposits may then appear to sustain the system without fixing the underlying gap.

The practical consequence is that control of private keys is only one part of custody. Customers also need confidence that the exchange has the assets its records promise. In a failure, the difference between “the coins are there but unreachable” and “the exchange owes more than it holds” determines whether finding a key could solve the problem at all.