The Gerald Cotten story remains relevant

In March 2023, Netflix premiered a series on the "late" former CEO of the defunct Canadian crypto exchange, Gerald Cotten.

Gerald Cotten was reported to have died in 2018 while on a honeymoon in India, and his wife only made his death public a month later. Panicked investors tried to withdraw their funds from his exchange but could not do so. It then emerged that Cotten was the only one with the keys to the offline wallets housing his clients' crypto funds. So the keys died with him, cementing the well-known crypto adage "not your keys, not your tokens". Estimates of funds that went with the wind stand at $ 250 million.

The story remains evergreen as it has repeatedly played out in other ways. The most recent was the 2022 implosion of the second-largest crypto exchange by trading volume, FTX.

From what has so far emerged in the media, the modus operandi of FTX and QuadrigaCX appear to be the same: co-mingling of traders' funds, unapproved transfers to third-party wallets, unhedged leveraged trades on other digital assets outside the exchange, and a centralized operation that appears to have been run by the young and inexperienced CEO and a handful of insiders with no professional training, no knowledge of compliance and zero internal controls.

The only major difference from the Gerald Cotten story is that the former FTX CEO of FTX, Sam Bankman-Fried, is still alive. Some of his fellow insiders have also spoken to authorities, and some of the company's monies are being recovered. 

Why is Gerald Cotten’s story still relevant?

The unfolding saga, which features US regulators and their recent lawsuit against Binance.US, continues to remind traders who care to take notice of the dangers of leaving funds in largely unregulated centralized exchanges.

Binance.US and CEO Changpeng Zhao have been slammed with serious charges.

The Binance token has already taken a massive hit in the market as traders rush to the exit door to sell off their holdings. It is not the first time. A December 2022 CNN report claimed that more than $ 3 billion was withdrawn from Binance on 13 December, 2022, after several negative headlines and the prevailing cloud of FTX saw cautious investors take out their funds. According to a Forbes report on the situation, more than $12 billion had been withdrawn from Binance when the cloud cleared.

The company survived this mini-run. But the new allegations against CZ, especially those claiming he siphoned customers' funds to his private wallets, are concerning. The company's response to suspend US dollar deposits indicates that the company is more than concerned about the situation. It has already suspended trading on several BNB pairs and is ending fiat deposits and withdrawals as it did in March with GBP customers.

Binance is not just another exchange. Whatever happens in the coming months regarding this case will have huge ramifications for the crypto market. Presently, no one knows where this is all headed. However, considering how US authorities have come down hard on those perceived as using cryptos to breach securities laws, it is safe to say that a guilty verdict will not be a pleasant situation for Binance and its customers.

Conclusion

The worst-case scenario would be the US Government taking over Binance's assets and seizing the webpage handling its trading business. Those who think this is a far-fetched view should go back to 2013 to see what US authorities did with Liberty Reserve and its founder Arthur Budovsky.

After a multi-year investigation spanning 17 countries, Budovsky was indicted over extensive money laundering and the flow of large amounts of illicit funds through his business. Not only were all the assets of that company and its major partners seized, but Budovsky and several associates were tried, found guilty, and jailed. Budovsky is still doing time in prison and, to date, many innocent entities who used the exchange for legitimate business have not recovered their funds.

You may argue that the crypto world is different now and operates at a time when there is stricter oversight on how monies are moved across the world. But when you also consider that many crypto exchanges are closing down accounts of Russians due to sanctions stemming from the ongoing Russia-Ukraine war, you suddenly become aware of how innocent people unconnected with the key events can quickly become collateral damage.

The story of Gerald Cotten is as relevant today as it was five years ago when his demise was reported. The Binance case presents another opportunity for investors to understand better why your tokens are only yours if you have control over the private keys needed to store or move them.