Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Last November, a Canadian cryptocurrency exchange called Einstein Exchange shut down, despite owing customers over $16 million worth of cryptocurrency. Those customers never got their money back.
Investigators from the British Columbia Securities Commission alleged that the exchange was bankrupt and didn’t have enough money to pay its customers. It turned out that the exchange held just $45,000 in assets, was in debt, and was fighting multiple lawsuits.
For Canadian cryptocurrency investors, it’s a cautionary tale: When investing in cryptocurrencies, make sure that you know where you’re putting your money.Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
What is Einstein Exchange?
Einstein Exchange was a cryptocurrency exchange registered in British Columbia. It was created in December 2017, only served Canadians, and claimed to be the “fastest growing exchange in Canada.” When it shut down, it reportedly had about 200,000 customers.
Einstein’s customers could use the exchange to trade a variety of cryptocurrencies, just like on any other major cryptocurrency exchange. It offered Bitcoin, Bitcoin Cash, Ethereum and XRP, among others. It supported the Canadian and the US dollar.
Einstein also claimed to be fully compliant with anti-money laundering procedures. It offered low trading fees—which fell to 0% for people who held over $250,000 on the exchange—free deposits and same day transfers of funds.
Moreover, it promised a “three-pronged approach” to security that “meets—or exceeds—the standards of even the most discerning enterprises.” Further, “All transactions are monitored and suspicious transactions are immediately reported to regulatory agencies.”
Einstein was a so-called “centralized exchange,” which means that Einstein controls any bitcoin you deposit in its accounts. This is how most major cryptocurrency exchanges operate—and how banks operate, too.
What happened to Einstein Exchange?
The British Columbia Securities Commission began investigating Einstein in May 2019 after the Commission received complaints from members of the public, who claimed that they couldn’t access the money they had deposited on Einstein. It also received complaints about “improper use of funds and potential money laundering.”
Sammy Wu, the lead investigator, said in a statement that he believed that Einstein was buying up cryptocurrencies from other cryptoexchanges and then reselling these cryptocurrencies to customers.
Wu alleged that Einstein “improperly used their customers’ assets” and commingled users’ fiat and crypto funds. This meant that Einstein’s ability to fulfill withdrawals from the exchange depended on how much their cryptocurrency holdings were worth.
On October 9, Wu demanded that Einstein provide information about its finances. Einstein gave Wu and his team nothing, but counsel for Einstein later told him that the exchange planned to shut down—but that it had enough money to fund “satisfy withdrawal request[s] from customers that have deposited at Einstein,” said Wu.
The Supreme Court of British Columbia eventually granted the Commission an order to appoint Grant Thornton as Einstein’s interim receiver.
The accounting firm Grant Thornton discovered that Einstein only had $30,000 in cash and under $15,000 in cryptocurrencies, as well as some laptops, cryptocurrency mining rigs, three Bitcoin ATM machines, and some office furniture. Grant Thornton also found that Einstein owed its employees $150,000, and owed money to Amazon Web Services.
The exchange shut down, the Commission advised that people lawyer up or fight it in the small claims courts.
What can we learn from Einstein Exchange?
Bitcoin runs on a blockchain, which is a decentralized ledger that contains no point of failure. Other, anonymous members of the network verify all of your transactions, and only the person with the passcode to a Bitcoin wallet can control funds contained within it.
This is the opposite of what happened with Einstein. To trade cryptocurrencies, people deposited their cryptocurrency to the exchange and thus relinquished control over it. This is what let Einstein run away with people’s money.
But all banks and cryptocurrency exchanges operate like this, right? The difference is that Einstein, unlike the traditional financial sector, is a cryptocurrency exchange. And a lot of these operate without much regulation, particularly in the early days of crypto.
The British Columbia Securities Commission said in its announcement last November: “The BCSC has not authorized any crypto-asset trading platforms to operate as an exchange. The BCSC, along with other Canadian securities regulators, continues to urge Canadians to exercise caution when buying or selling any crypto-assets due to various risks, including the loss of some or all of their investment.”
Deposits to registered Canadian banks of up to $100,000 are covered by the Canadian Deposit Insurance Corporation (CDIC).
The bottom line: When depositing money in cryptocurrency exchanges, do your research and always consider the risk. Even large companies that appear trustworthy—like Einstein with its 200,000 customers—can default on payments.
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