FCoin Exchange Comes Up Short, Up To 10,000 BTC Of Traders Assets Gone Due To Errors
FCoin, the famous cryptocurrency exchange that uses the trans-fee mining model, has revealed a shortage of $130 Million in crypto-assets and paused both withdrawal and trading on its platform.
FCoin was launched in May 2018 by the former CTO of Huobi, Zhang Jian, who said on Monday in a blog post that the exchange is no longer able to process withdrawals and that the FCoin assets reserve gap is at about 7,000 to 13,000 Bitcoin (BTC). He also mentioned the system hasn’t been hacked and that no one is trying to pull a scam, but that the problem is too difficult to explain, also owed to a series of internal system errors.
What Is Trans-Fee Mining?
For those that may not remember (you won’t be faulted if you don’t, don’t worry), “FCoin” is the father of ‘transaction mining’. “Transaction mining” is the term given to exchanges that engage in the gimmicky practice of rewarding their followers based on their traded volume.
FCoin introduced the trans-fee mining model that incentivizes trading. The exchange didn’t launch an airdrop or an initial coin offering but instead issued 51% of FTs for the transactions made. FCoin also distributed 80% of the transaction fees that it has collected in BTC and ETH to FT holders.
While believed by many to enable the FT’s price manipulation, the model was rapidly adopted by others, but as Zhang says, there were some errors in the FCoin system, errors that led to more mining rewards being given to users who didn’t deserve them, ever since 2018. The firm set up complete auditing for managing the treasury later in 2019.
The “reward” is quantifiable- in FCoin’s case, it was actual payment in the form of their ‘exchange token’.
The issues with this setup were obvious:
A) This practice blatantly & explicitly encourages fraudulent trading practices such as wash trading / artificial sell + buy walls / ‘milking the market’ etc,
B) It gives an exchange a false appearance of legitimacy because naive traders may sign up there after seeing the astronomical volume totals that were artificially generated because they will perceive the volume to be evidence of genuine liquidity.
C) The exchange token payout is essentially a ponzi because it’s value is rooted in the idea that there’s some sort of worth or usefulness in the token itself.
This point requires a more flexible line of thought, because we’re not defining monetary value by the classical standard of the currency being “backed” or something of that nature.
In this case, we’re defining ‘value’ as the floating market rate that traders & others place on the currency. For example, Bitcoin has value. There are those that feel the value is undeserved, but to argue it doesn’t have objective value (as in if you screamed out, “Who wants a free Bitcoin??” in a crowded theatre, people would bum rush you), is simply illogical.
Buying FTs from the Secondary Market Was a Mistake
While the FT price continued to drop in 2019, the FCoin team bought back FTs from the secondary market in an effort to boost the need for the token’s price, but this was an error made by Zhang and his employees because it gave many clients the freedom to sell and withdraw much more than how much it should have been in their account balance and this way, causing FCoin to lose its balance sheet.
Users’ Withdrawals Requests to Be Handled by Zhang
FCoin has suspended its platform a few days ago after it has discovered a problem with risk-control. In his blog post, Zhang said he will manually and personally handle the users’ email requests for withdrawals. He also mentioned that he will use the profits made from his other projects to compensate for the losses suffered by FCoin users.
— FCoin (@FCoinOfficial) February 17, 2020
The core issue here is that FCoin cropped up as a potential evolution to the model that Binance had created – which is still serving them well for what we know.
That model is the practice of establishing an exchange token that essentially serves as a digital, quasi-stock purchase.
Except, unlike stocks, you as the exchange (business/corporation) are not beholden to your shareholders & you also aren’t giving up any actual equity.
Also, you are able to essentially generate wealth for yourself “out of thin air” because you can generate an arbitrary number of these tokens.
Thus, FCoin’s apparent “insolvency” is somewhat remarkable when considering that they were essentially operating an extremely low-overhead Ponzi scheme propelled by an exchange token that fundamentally amounted to “free money”.
We’re going to take a greater look at what this means for the Crypto space & whether other exchanges that engaged in this practice (ex: BitMax) may be at risk of falling victim to the same financial woes that FCoin just succumbed to.