FCoin, a crypto exchange that adopted the controversial “trans-fee mining” model, has paused trading and withdrawal as it reveals a shortage of crypto assets worth up to $130 million.
Zhang Jian, the former Huobi CTO who launched FCoin in May 2018, wrote a lengthy post on Monday, saying the exchange is now unable to process users’ withdrawal demands as its asset reserve has fallen short of its liability – and the gap is estimated to be about 7,000 to 13,000 bitcoin (BTC).
The post, first published in Chinese and later translated on Reddit, comes as a shocking notice to users in China as the significant amount of assets in question led to the insolvency of the controversial model that at one point made FCoin one of the largest exchanges by trading volume.
Zhang claimed in the post the exchange was neither hacked nor an exit scam but the problem is “a little too complicated to be explained in a single sentence.”
In summary, he said the issue came from internal system errors that have – for a long period of time – credited users with more transaction-based mining rewards than they should have received. As the company failed to spot this soon enough to remedy the situation, the snowball has grown even larger since the beginning of 2019.
Fcoin went live around May 2018, introducing a novel model called “trans-fee mining” to incentivize trading and to issue its exchange token dubbed FT.
Instead of launching an initial coin offering or an airdrop, FCoin issued 51 percent of its FTs to the public in exchange for making transactions. For instance, for every transaction fee a user paid to FCoin in the form of either bitcoin or ethereum, the platform would reimburse the user 100 percent of the value in FTs.
In addition, FCoin would distribute 80 percent of the transaction fees it collected in bitcoin and ether to users who held FTs bitcoin continuously throughout a day. This model, while being criticized for possibly enabling price manipulation of the FT, was quickly adopted by others and led to a shake-up among exchanges in terms of volume ranking.
However, according to Zhang, errors in FCoin’s system started to give away more mining rewards to users than they should have earned, beginning in mid-2018. The firm did not set up a complete back-end auditing system to properly manage its treasury until mid-2019, he said.
As the price of FT continuously decreased through 2019, Zhang said he and his team have been buying back FTs from the secondary market in efforts to increase the buying demand for the token’s price, which was one of the “decision errors” he made.
Zhang said the system problem coped with these “decision errors” gave a large amount of users the opportunity to sell and withdraw more than what should have been on their account balance, causing the significant loss of FCoin’s assets on its own balance sheet.
The announcement came just days FCoin suspended its entire platform after discovering a risk-control issue. Zhang said in the post that he will now personally and manually process users’ withdrawal requests made via emails.
He claimed that he will “switch tracks and start again” and hopes to use profits from his new projects to “compensate everyone for their losses.”