Imagine for a moment, if you will, a casino that allows certain privileged customers the ability to make risky bets without putting up any collateral. Instead, the funds of regular customers are secretly used to finance these bets without their knowledge. What happens when a lost bet is unable to be repaid? Customers of CoinFlex crypto derivatives exchange, of which I am one of them, found out when the exchange could not meet its withdrawal obligations last week.
As we now know, CoinFlex gave special privileges to a high-net-worth individual which made said individual immune to liquidation on leveraged positions. According to CoinFlex this person’s account entered an extreme negative balance during the recent crypto market crash, $47 million USD in the negative to be exact. It is then alleged that this customer was unable to repay his debt due to temporary liquidity issues, therefore the balance was paid for with the funds of unsuspecting CoinFlex customers who only realized something was wrong when withdrawals from the platform began to slow. Initially this was attributed to a “backlog” of withdrawals by CoinFlex staff but as more customers caught on and tried to withdraw, CoinFlex had no choice but to announce a complete pause to withdrawals on June 23rd. They were insolvent.
Innocent businesses and users in the SmartBCH ecosystem have also been dragged into this crisis by CoinFlex, who has until now facilitated a centralized bridge between the Bitcoin Cash main chain and SmartBCH on layer 2. They are custodian to over 100,000 Bitcoin Cash which backs the SmartBCH tokens, equivalent to more than $10M USD, and by looking on the blockchain these Bitcoin Cash remain untouched in their wallet. It is therefore unclear why Mark Lamb, CEO of CoinFlex, has stated that these Bitcoin Cash are in the same boat as regular deposits. The SmartBCH backing is completely separate from the exchange and its liabilities but given that it is being held in limbo, CoinFlex may be intending to absorb these Bitcoins to help pay off their deficit. This is basically an absolute worst-case scenario for SmartBCH; the only thing that could be worse is if CoinFlex was hacked and the funds stolen. That’s basically what has happened at this point, except the coins have been stolen by CoinFlex themselves. While most if not all SmartBCH users were aware of the risks associated with the centralized bridge, I don’t think anybody expected this to occur. If only there was a greater sense of urgency for the decentralized SmartBCH bridge, we may have averted this disaster.
Right now, all hope lies with CoinFlex who have repeatedly stated they are aiming to re-enable withdrawals and make all their customers whole on June 30th. To achieve this goal, they have devised a new scheme which tokenizes the $47M debt of their privileged customer and pays 20% APR to those who bail him out. The new token is called rvUSD, which allegedly stands for Recovery Value USD, and Mark Lamb has stated they have already secured commitments for the sale of more than half of these tokens. Assuming they are telling the truth, things may return to normal in a few days. However, there is always the possibility they are telling us what we want to hear in order to pacify us and buy more time. Personally, I think there is a 50/50 chance they will deliver, or we get given another excuse when the clock runs down. Until a week ago, I had no reason to doubt the trustfulness of CoinFlex. But they were not initially truthful about their situation, blaming pending withdrawals on a transaction backlog instead of admitting that they were insolvent. I initiated a withdrawal 3 days prior to them officially pausing withdrawals and after waiting 24 hours for it to process I raised my concerns with Mark Lamb directly. He assured me that it was it was being sent out soon, but now as we all know that was never possible.
In the meantime, people have been speculating about who the indebted trader is. There were never too many people who fit the criteria, given that CoinFlex is a relatively small exchange, and so many people had guessed that it may have been Roger Ver who is an investor in CoinFlex. Whether it was a coincidence or intentional, his initials R.V. are also part of the new rvUSD token’s name. This is when things got spicy, as Roger Ver responded to this speculation with a tweet saying that the rumours about him being in debt to CoinFlex are false and that actually he is owed a substantial sum of money by CoinFlex. Mark Lamb then immediately fired back with his own Tweet thread that outed Roger Ver as the trader who allegedly owes CoinFlex $47M USD. Mark claims that Roger defaulted on his agreement with CoinFlex, despite having a long track record of meeting the margin requirements on his account. Until this point, it seemed to me like CoinFlex were unjustly protecting the identity of this trader, but Mark goes on to say he felt the need to reveal the identity after Roger denied that the CoinFlex debt pertains to him. Mark also denies that CoinFlex has any debt owing to Roger.
So now we are in a situation that can only be summed up as a complete clown show. It was extremely negligent of CoinFlex to allow accounts to avoid liquidation and trade without providing collateral. It was also reckless of the trader, allegedly Roger Ver, to manage his account’s risk in the way he did. With CoinFlex and Roger in public disagreement, if there was any attraction for buyers of rvUSD it is now gone. CoinFlex are left with a hard sell and their customers are the ones who’ve been made to foot the bill. It is after all the natural course of things, where profits are privatized and losses are socialized. What’s clear to me is that there’s more to this story than we are being let in on and I think it’s in the best interest of all parties that the full details of this situation are made public.