Chinese crypto exchange FCoin has paused trading as it may not be able to pay back between 7,000 to 13,000 BTC (about $67 million to $125 million) that it owes to its clients.
Founder of Fcoin and former CTO of Huobi, Jian Zhang, published a post named “FCoin Truth,” where he claimed that the exchange didn’t go default because of an external hack nor scam, but a “data error” and a “decision error.”
“The biggest problem that FCoin currently faces is not the problem that the system cannot be restored, but the problem that the capital reserve cannot be paid by users. The internal problems and technical difficulties we face are the results of financial difficulties,” he wrote in the post.
Zhang said that because of the internal system errors, consumers have been awarded more transaction-based mining rewards than they should have received over a long period of time. The company spotted the issue too late, which resulted in the snowball getting even larger since the beginning of 2019.
FCoin was launched in May 2018, introducing a new business model called “trans-fee mining.”
Upon the rollout, FCoin launched FT tokens and distributed 51% of them publicly by repaying transaction fees. The scheme has encouraged users to make as many transactions as possible since the exchange refunded 100% in FT tokens of the transaction fees they paid. Also, consumers were refunded 80% of the platform’s daily revenue from transaction fees.
A few weeks after FCoin went live, it was reported that its daily trading volumes jumped over $5.6 billion, surpassing the Top 10 exchanges on CoinMarketCap at that time.
In the post, Zhang said he personally made between $150 million to $200 million over the first few months, and sometimes the daily revenue payouts would be close to 6,000 BTC.
However, due to the inadequate technical platform the exchange had at that time, FCoin couldn’t sustain the momentum, Zhang wrote in the blog post. At one point in mid-2018, FT token price sharply plunged, making the user community very unhappy. Additionally, Zhang decided to use FCoin funds and all its personal profits to buy back FT tokens, but since some consumers had found a way to take advantage of the exchange’s fragile backend system to get more dividends, the repurchase continued to drain both FCoin’s and the team’s personal funds until its recent shutdown.
Zhang asked the founder of the Huobi Lin Li to help him out, however, Li refused.
“I told him the real reason (but not as detailed as this article), and then we explored possible rescue solutions. The results were exactly the same as I expected. Because I know that if Li Lin agreed to rescue, Huobi would not have today or tomorrow. If I were in his position that day, I should and would have made the same decision,” Zhang wrote.
Last week, FCoin published an announcement where it said it had destroyed all of the unissued FT tokens and all of the 720 million tokens owned by the team.