In retrospect, you will see how CoinFlex has been lying about its liquidity situation all along.
It all started on June 18 when users’ withdrawals started taking an unusually long time to process.
They claimed the delay in processing withdrawals was due to a backlog resulting from the recent increase in market activity.
And that they’re working through transactions as quickly as possible, and everything should be normal again within the next few days.
This is where all the lies began, as you’ll see from the situation that’s unfolding.
CoinFlex pauses withdrawal
Things started falling apart on June 23 when the CEO, Mark Lamb announced that the exchange would be pausing all withdrawals due to “market conditions and uncertainty involving a counterparty”
This confirms that the earlier story about withdrawal delays being due to “an increase in market activity” was a lie. They were actually having a liquidity crisis then and they knew it.
What really happened?
The details are still unfolding.
However, the crux of the matter is that CoinFlex gave an unnamed individual a kind of uncollateralized loan using its customers’ funds.
One user on CoinFlex could trade with leverage with no risk of liquidation based on some supposed personal guarantee backed by the individual’s illiquid other assets.
Call that schoolboy error, but I call it the highest level of irresponsibility and terrible risk management practice.
It also shows how the crypto industry, needs heavy regulation and close monitoring by the government.
Even if such practices are permissible, you should back it with the company’s own money, not all the users’ deposits.
Oh! I forgot.
“Not your keys, not your coins”. And your money on their platform is their money.
CoinFlex’s proposed solution
Four days after pausing withdrawal, the CEO gave an interview (ran an Ad) on Bloomberg where he revealed that they will:
- be launching a new token called Recovery Value USD (rvUSD) backed by the debt (47,000,000 rvUSD).
- sell this rvUSD token to non-US resident sophisticated investors with a 20% APR to boost interest,
- raise the required liquidity and resume normal operation including enabling all withdrawals.
If this all sounds like some monopoly game or an ultimate degen play, it’s because it is.
If you buy this token, you will be able to convert it to USDC (including all accrued interest) when the unnamed individual fully repays the debt in USDC.
And if they don’t pay up within 15 months from when the rvUSD sale closes, CoinFlex will pay you in USDC from its balance sheet. Or pay you in a mixture of USDC and FLEX coins from the existing CoinFlex treasury.
You can read the rvUSD Whitepaper for more details.
This sounds complicated, but it’s workable with sufficient trust and commitment from the investors and the CoinFlex team.
However, another problem surfaced as rumours started spreading that the unnamed individual owing CoinFlex is Roger Ver.
Roger Ver: I am not owing CoinFlex, infact they owe me
Wait a minute!
How can two parties not know who owes who $47 million?
This is when things started getting really messy.
And Mark released a counter tweet, officially announcing who this mysterious debtor is and how the debt came about.
All this while, it seemed like Mark was trying to protect the debtor’s privacy by not revealing their identity.
But upon a close look at the unfolding facts, he’s intentionally lying and withholding the facts for other reasons yet to be revealed.
- If Roger Ver hadn’t denied the rumours, Mark would never have revealed who supposedly gambled away CoinFlex depositors’ funds.
- CoinFlex does not even have an understanding with or settled on a repayment plan with the unnamed debtor, but they went ahead to initiate a new token sale that is based on the guy paying his debt.
Something just doesn’t feel right here.
And that’s why it seems nobody is willing to buy the new rvUSD token.
Because the guy who’s supposedly going to pay them back with a 20% says he’s not even owing CoinFlex, to begin with.
And hardly any sane person will trust CoinFlex with all the lies and attempts to mislead unsuspecting investors into taking on a bad debt.
How SmartBCH got caught up in the crossfire
CoinFlex is not only inconveniencing all its customers, but it’s also holding an entire chain (SmartBCH) hostage.
SmartBCH is a BitcoinCash (BCH) sidechain that uses the BCH coin as its gas or resource consumption token.
To use BCH on SmartBCH, you first have to bridge it using CoinFlex. There’re other bridges but they all rely on CoinFlex for their operation.
CoinFlex holds your BCH on the Bitcoin Cash main chain and mints sBCH (BCH on SmartBCH) for you.
With the pause on withdrawals, there’s no way for SmartBCH users to convert sBCH back to BCH because the exit liquidity (BCH) is locked.
SmartBCH coins are in the same position as deposits on CoinFlex
wow!
According to Mark, the SmartBCH BCH coins in CoinFlex’s custody are in the same position as users’ deposits.
Currently, 101,382.3 BCH owned by SmartBCH users is being held hostage in the CoinFlex bridge until withdrawals are enabled.
The coins are still intact, but due to legal concerns, CoinFlex claims they can’t transfer them to the SmartBCH team while the case is still in dispute.
So, the SmartBCH users have to wait indefinitely, pending when the bridge will be reopened.
However, the SmartBCH team have been working to devise an alternative bridging system and restore the normal functioning of the chain.
Enters the Bail-Out DAO (BODAO)
Some BCH supporters, working with the SmartBCH team have set up the BODAO to raise the required 101,382.3 BCH and restore the BCH <-> sBCH peg back to 1:1.
This way, SmartBCH users can immediately resume doing business as usual. And when CoinFlex finally releases the encumbered BCH in its custody, the BODAO will receive it.
And if CoinFlex will not release the coins, BODAO will take it upon itself to use every legal means necessary to recover the funds.
As part of this arrangement, BODAO will issue a governance token named SCG which will have 25% governance power on SmartBCH while sBCH holders will have 75% voting power.
You can read the details of this new plan here.
In the meantime, until the BODAO become operational, everyone is making do with the emergency bridges being run by some key players on the network.
The liquidity on these bridges is very low, plus most of them only support bridging BCH to SmartBCH and not otherwise.
Hindsight
Prior to the withdrawal delays, some users claimed to have noticed massive liquidity removal on all FlexUSD pairs on CoinFlex.
Furthermore, there were noticeable sBCH to BCH movements that could indicate insiders securing their positions ahead of what was coming.
But CoinFlex claims these are regular customers moving their funds. It’s probably just a coincidence.
The full details of how the $47 million loss came about are yet to be revealed.
But one thing is for sure, CoinFlex is intentionally withholding information and using delay tactics with everyone.
Everything we’ve known so far only got revealed because Roger Ver came forward to deny the rumours spreading about him owing CoinFlex.
And this weekend, he’s coming out again with a statement which may shed more light on the $47 million loss CoinFlex claims he owes them.
I will be updating this post with new information as the situation unfolds over the weeks ahead.
Stay tuned!
UPDATED: July 5, 2022
Roger never made the detailed statement he promised.
He claimed, in a Twitter Space talk, that his lawyers advised against making any further public statement on the situation.
And as for SmartBCH and CoinFlex, the situation is still the same.
However, the SmartBCH team have have decided to adopt the Bolivar bridge by BlockNG in swapping BCH into sBCH.
They’ve cancelled their previous plan to deploy a new centralized bridge because it will take up more of their time and delay the development of SHA-Gate —a decentralised bridge for SmartBCH.
What do you think of the CoinFlex vs Roger Ver vs SmartBCH situation? Join the discussion in our Telegram group.