[In]Securities Guest Blog: Not Dead Again Today? by Aegis Frumento Esq

December 19, 2019

Not Dead Again Today?

Quantum mechanics has to be the weirdest subject around, with the possible exception of tax law. One of its weirder aspects is the idea of "superposition," which superposits that parts of atoms -- like electrons, protons and neutrons -- exist in nature simultaneously as both particles and waves. This apparent contradiction led physicist Edwin Schrodinger to invent his famous thought experiment with the cat that is both dead and alive at the same time -- the famous "Schrodinger's cat."

Put a cat and some poison in a box. There's a 50% chance that the poison will kill the cat in a certain amount of time. At the end of that time, when we look in the box, the cat we see will either be dead or alive, but until we look the cat can be either. Therefore, Schrodinger concludes, the cat is both dead and alive at the same time, its life-and-death being "superposed" upon each other. This YouTube video explains the experiment. https://www.youtube.com/watch?v=IOYyCHGWJq4.

Schrodinger thought the conclusion of his thought experiment to be such nonsense that he abandoned quantum mechanics entirely. But reality is even weirder than that. When it comes to detecting pieces of atoms, "looking in the box" involves setting up detection equipment. Detection equipment tends to be specialized: it will detect only what it is designed to detect. If your detection equipment is designed to find particles, it won't find waves. And if it is designed to look for waves, it won't find particles. If a piece of an atom is both a particle and a wave, then a particle detector will find a particle and a wave detector will find a wave, and that is what happens experimentally.

So, it turns out that the state of the thing being looked at depends primarily on the intentions of the person looking. If you open the box looking for a live cat, that's what you'll find; and if you're looking for a dead cat, you'll find that too. That weirdness drives the plot of many stories, science fiction and otherwise. Consider the Toy Story franchise. A toy that is alive when you're not looking at it but inert when you are is precisely in a state of quantum superposition. Vers l'infini et au-delà!  https://www.youtube.com/watch?v=QnjjaBFfUgc

Contradictions like that drive scientists mad. But those of us who daily swim in ambiguity and contradictions take it in stride. Last Valentine's Day I wrote about how Gerald Cotten, the founder and CEO of the Canadian cryptocurrency exchange QuadrigaCX, died of Crohn's disease while trekking through India without leaving the passwords needed to access some $14 million worth of ether (the cryptocurrency of the Ethereum blockchain) that Quadriga held for customers. To Hold and Have Not, http://www.brokeandbroker.com/4438/aegis-frumento-quadrigacx/. Now we're not sure that Cotten is still dead. He is, you could say, in a state of superposition.

Crypto currencies are probably the last bastion of assets that can truly be held anonymously. We all grew up hearing of "numbered" Swiss bank accounts, where all you needed to do was show up at the bank and present your account number to access your funds, no questions asked. That was always something of a myth. Swiss banks always knew who their customers were. More recent anti-money laundering legislation around the world mostly requires Swiss banks to share what they know about non-Swiss account holders with other governments. See

There seem to be safe deposit boxes offered by non-bank institutions, like Das Safe in Austria, that retain the look and feel of anonymous numbered accounts. https://www.dassafe.com/service.html. In theory, you can anonymously store your gold bullion there and whoever walks in with your password and key can get at it, no questions asked. At least that's how it's described in the press. https://nomadcapitalist.com/2014/05/16/anonymous-gold-storage-das-safe-austria/. Curiously, though, its website, written natively in German, calls its service Legitime Fächer. Google translate renders that in English as "Legitimate subjects" while the official English translation on the site itself renders it as "Non-anonymous Safes." So, anonymous or non-anonymous? Schrodinger's identity, I guess.

But back to our story. This past June, Quadriga's bankruptcy trustee reported the following:

Significant volumes of Cryptocurrency were transferred off Platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr. Cotten. It appears that User Cryptocurrency was traded on these exchanges and in some circumstances used as security for a margin trading account established by Mr. Cotten. Trading losses incurred and incremental fees charged by exchanges appear to have adversely affected Quadriga's Cryptocurrency reserves. In addition, substantial amounts of Cryptocurrency were transferred to wallet holders whose identity the Monitor has been unable to confirm;

Mr. Cotten created Identified Accounts under aliases where it appears that Unsupported Deposits were deposited and used to trade within the Platform resulting in inflated revenue figures, artificial trades with Users and ultimately the withdrawal of Cryptocurrency deposited by Users; and

Substantial Funds were transferred to Mr. Cotten personally and other related parties. The Monitor has not located any support justifying these transfers.

https://bit.ly/2M7RSMC. All of which is to say, it looks like Cotten stole Quadriga's cryptocurrency to engage in private speculation. Crypto-theft like that is nothing fancy. It's just plain old embezzlement. https://www.coindesk.com/quadrigacx-ceo-set-up-fake-crypto-exchange-accounts-with-customer-funds. That discovery, combined with the facts that Cotten was a young man and that Crohn's disease is seldom fatal, have led many to ask the obvious question: Is Cotten really dead? To find out for sure, they now want to open his grave to see if he's there. https://www.nytimes.com/2019/12/17/business/gerald-cotten-death-cryptocurrency.html. Call it 
Schrodinger's Cotten, if you like.

I admit it makes perfect sense to suspect that Cotten faked his own death. Still, it's a clumsy way to do it. Why leave a body? And if you do leave a body, why not arrange to have it cremated? It seems to me, that if Cotten wanted to commit the perfect crime, he would have staged his own death in such a way that it could never be discovered. He could have gone overboard in the Indian Ocean or missing in the Himalayas, or he could have arranged for "his" body to be consigned to the flames in a devotion to the Hindu god Agni and his ashes scattered on the Ganges. Then, after the search parties came back empty-handed, and the mourners had forgotten him, he could have checked into an ashram for a decade or so waiting for statutes of limitation to expire and Quadriga and its creditors to have moved on to other fiascos.

But Cotton didn't do anything like that. And so, Cotten at the moment is both dead and alive, in that weird quantum way of it. He is alive in the hope of Quadriga creditors that all that ether is not merely, well, ethereal. But even if it's not his body in the crypt, until Cotten is actually found, and until he divulges the cryptographic keys needed to transfer Quadriga's ether on the Ethereum blockchain, he might as well be dead. The Quadriga story remains one of the best real-world demonstrations both of blockchain's strengths and its risks. Like the old mythical Swiss numbered accounts, and maybe like Das Safe's anonymous/non-anonymous deposit boxes, assets on a blockchain are incredibly secure. With the codes and keys, you alone can move your cryptoassets, and you can do so anonymously. But if anyone else gets those the codes and keys, you are screwed. Any imposter can take your assets as easily as you can -- and just as anonymously. A crypto-thief can be as good as dead to you, and yet alive enough to enjoy his crypto-booty at the same time. Now that's superpositioning!


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters.  Mr. Frumento also represents clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. Those now include industry professionals looking to adapt blockchain technologies to finance and financial market enterprises.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog. 

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