FCoin Collapses: Difference between revisions
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[[File:Fcoinexchange.jpg|thumb|FCoin Exchange Homepage/Logo]] | |||
Whether people want to call something poor auditing or an exit scam, the end result is that investors lose their funds. Any model which deals with partial reserves, or is unaware of the reserve level, is subject to this risk. China (just like Canada) lacks any sort of solid regulatory framework for exchanges at all. It’s only fitting we should see yet another exchange collapse while I’m in the midst of writing this post. | |||
[[File: | |||
== About FCoin == | == About FCoin == | ||
founded by Zhang Jian | |||
Homepage: <ref>[https://web.archive.org/web/20180712224726/https://www.fcoin.com/ FCoin Homepage Archive July 12th, 2018 4:47:26 PM MDT] (Nov 30, 2023)</ref> | |||
"In May 2018, FCoin entered the crypto exchange scene with a novel business model called “trans-fee mining.” This new development took the concept of exchange tokens to another level by reimbursing users with a percentage of the transaction fees received by the platform."<ref name="cointelegraph-106" /> | |||
== The Reality == | |||
“While FCoin was pulling in large transaction volumes, the back-end architecture that ought to prevent any abuse of the system was not yet in place.” | |||
“poor back-end controls on the exchange meant that some users were receiving fee reimbursements in excess of the stipulated amounts prescribed by the model.” | |||
More:<ref name="cointelegraph-106" /> | |||
== What Happened == | == What Happened == | ||
The | “Less than two years after bursting onto the scene, Chinese crypto exchange FCoin has shut down its operations. The platform, founded by Zhang Jian, also says it may be unable to pay the 7,000 to 13,000 Bitcoin (BTC) — about $67 million to $125 million — that is owed to its customers.” | ||
{| class="wikitable" | {| class="wikitable" | ||
|+Key Event Timeline - FCoin Collapses | |+Key Event Timeline - FCoin Collapses | ||
| Line 43: | Line 24: | ||
!Event | !Event | ||
!Description | !Description | ||
|- | |||
|April 2019 | |||
|Net Outflows Absent | |||
|Another puzzling question from the FCoin debacle shows up in the absence of net outflows between April 2019 and August 2019<ref name="cointelegraph-106" />. | |||
|- | |||
|August 30, 2019 | |||
|FCoin Price Crash | |||
|The FCoin price crashes<ref name="cointelegraph-106" />. "Buoyed on by the upward trajectory of FT’s price action, platform users were increasing their transactions on the platform, earning valuable FCoin tokens that were likely sold for other cryptocurrencies like Bitcoin. Meanwhile, poor back-end controls on the exchange meant that some users were receiving fee reimbursements in excess of the stipulated amounts prescribed by the model. Then came the crash of FT, with the price falling by about 95%." | |||
|- | |- | ||
|February 1st, 2020 12:01:35 AM MST | |February 1st, 2020 12:01:35 AM MST | ||
| Line 51: | Line 40: | ||
| | | | ||
| | | | ||
|- | |||
|February 22nd, 2020 7:45:00 AM MST | |||
|CoinTelegraph Article On Collapse | |||
|CoinTelegraph reports that less than two years after its launch, Chinese cryptocurrency exchange FCoin has abruptly shut down, leaving customers owed an estimated 7,000 to 13,000 Bitcoin (BTC) — roughly $67 million to $125 million — with potential difficulties in compensation<ref name="cointelegraph-106" />. Founder Zhang Jian, the former chief technology officer of Huobi, attributed the insolvency to poor auditing practices and internal problems rather than a hack or exit scam. However, crypto experts suspect an exit scam as the platform's cold wallet revealed numerous transfers to other exchanges and the destruction of approximately $75 million worth of its native token. The situation has sparked concerns about user compensation and potential legal consequences for Jian, especially given China's stance on cryptocurrency trading. | |||
|} | |} | ||
== Technical Details == | == Technical Details == | ||
And much more in <ref name="cointelegraph-106" /><blockquote>With events still unfolding, unanswered questions persist about the nature of FCoin’s demise. For one, why was there an increasing amount of net BTC outflows from the platform’s cold wallet while the price of FT was tumbling? | |||
These outflows do not appear to be user withdrawals, given their non-random nature. Data from on-chain analysis shows that the transaction amounts were always nice, round digits such as 100 BTC or 150 BTC. Dovey Wan, a founding partner at blockchain investment firm Primitive Ventures, argued that the orderly distribution of the net outflows is proof that those transactions were not user withdrawals. | |||
In a separate analysis by white hat crypto transaction analyst ErgoBTC, there is evidence that shows every outbound transaction from FCoin’s cold wallet is followed by a 100 BTC or 150 BTC deposit on an exchange such as Huobi or OKEx.</blockquote> | |||
== Total Amount Lost == | == Total Amount Lost == | ||
The total amount lost has been estimated at $125,000,000 USD. | The total amount lost has been estimated at $125,000,000 USD. | ||
== Immediate Reactions == | == Immediate Reactions == | ||
How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed? | How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed? | ||
=== Promise To Pay Back Affected Users === | |||
"Jian promised to pay back affected users, revealing that he was personally overseeing email withdrawal requests from users of the platform. According to Jian, this process could take between one and three months, with the FCoin founder stating that profits from his next venture will also be used to compensate the victims of the crypto exchange’s insolvency<ref name="cointelegraph-106" />." | |||
Review announcement linked from <ref name="cointelegraph-106" /> | |||
=== Initial Attempts To Relaunch The Exchange === | |||
FCoin published a statement on February 20th which included the possibility of reopening the exchange<ref name="cointelegraph-106" />.<blockquote>“At present, the social committee and Zhang Jian are discussing the restart plan, and the follow-up will be gradually disclosed to the community according to the process.”</blockquote> | |||
=== Justin Sun Offering BTT For Poloniex Move === | |||
Justin Sun reportedly promised any affected FCoin user 1000 free BitTorrent tokens (BTT) if they moved to the Poloniex exchange<ref name="cointelegraph-106" />. | |||
=== Accusations of Ponzi Scheme Operation === | |||
Josh Lawler, a partner at Zuber Lawler and Del Duca LLP, told Cointelegraph<ref name="cointelegraph-106" />:<blockquote>“The story of FCoin, intentional or otherwise, is that of a Ponzi scheme. The facts and circumstances would be violations of any number of regulatory laws designed to prevent exposure of the investing public to fraud and incompetence. At best, FCoin’s story is a combination of the two. In the digital asset space, it is a cautionary tale as to what happens when undercapitalized and over-exuberant entrepreneurs try to become instant unicorns.” </blockquote> | |||
== Ultimate Outcome == | == Ultimate Outcome == | ||
The incident was included in the Slowmist exchange list.<ref name="slowmisthacked-1160" /> | |||
== Total Amount Recovered == | == Total Amount Recovered == | ||
Although a recovery was initially promised, there do not appear to have been any funds recovered in this case. | |||
== Ongoing Developments == | == Ongoing Developments == | ||
TBD | |||
== General Prevention Policies == | == General Prevention Policies == | ||
When countries and governments prevent legitimate entities from operating exchanges, the result is a market void that is often filled with criminals. Where identities of operators are known and the funds are stored in a proper multi-signature wallet, a situation where one party takes the funds has never happened. You can also be certain that there was no auditing happening, and the exchange likely hadn't contemplated any hot wallet contingencies. | When countries and governments prevent legitimate entities from operating exchanges, the result is a market void that is often filled with criminals. Where identities of operators are known and the funds are stored in a proper multi-signature wallet, a situation where one party takes the funds has never happened. You can also be certain that there was no auditing happening, and the exchange likely hadn't contemplated any hot wallet contingencies. | ||
| Line 92: | Line 99: | ||
== References == | == References == | ||
<references><ref name="cointelegraph-106">[https://cointelegraph.com/news/fcoin-blames-poor-auditing-for-shutdown-but-others-suspect-exit-scam FCoin Blames Poor Auditing for Shutdown, but Others Suspect Exit Scam] (Feb 22, 2020)</ref> | <references> | ||
<ref name="cointelegraph-106">[https://cointelegraph.com/news/fcoin-blames-poor-auditing-for-shutdown-but-others-suspect-exit-scam FCoin Blames Poor Auditing for Shutdown, but Others Suspect Exit Scam - CoinTelegraph] (Feb 22, 2020)</ref> | |||
<ref name="slowmisthacked-1160">[https://hacked.slowmist.io/en/?c=Exchange SlowMist Hacked - SlowMist Zone] (Jun 26, 2021)</ref></references> | <ref name="slowmisthacked-1160">[https://hacked.slowmist.io/en/?c=Exchange SlowMist Hacked - SlowMist Zone] (Jun 26, 2021)</ref> | ||
</references> | |||
Latest revision as of 13:41, 30 November 2023
Notice: This page is a new case study and some aspects have not been fully researched. Some sections may be incomplete or reflect inaccuracies present in initial sources. Please check the References at the bottom for further information and perform your own additional assessment. Please feel free to contribute by adding any missing information or sources you come across. If you are new here, please read General Tutorial on Wikis or Anatomy of a Case Study for help getting started.
Whether people want to call something poor auditing or an exit scam, the end result is that investors lose their funds. Any model which deals with partial reserves, or is unaware of the reserve level, is subject to this risk. China (just like Canada) lacks any sort of solid regulatory framework for exchanges at all. It’s only fitting we should see yet another exchange collapse while I’m in the midst of writing this post.
About FCoin
founded by Zhang Jian
Homepage: [1]
"In May 2018, FCoin entered the crypto exchange scene with a novel business model called “trans-fee mining.” This new development took the concept of exchange tokens to another level by reimbursing users with a percentage of the transaction fees received by the platform."[2]
The Reality
“While FCoin was pulling in large transaction volumes, the back-end architecture that ought to prevent any abuse of the system was not yet in place.”
“poor back-end controls on the exchange meant that some users were receiving fee reimbursements in excess of the stipulated amounts prescribed by the model.”
More:[2]
What Happened
“Less than two years after bursting onto the scene, Chinese crypto exchange FCoin has shut down its operations. The platform, founded by Zhang Jian, also says it may be unable to pay the 7,000 to 13,000 Bitcoin (BTC) — about $67 million to $125 million — that is owed to its customers.”
| Date | Event | Description |
|---|---|---|
| April 2019 | Net Outflows Absent | Another puzzling question from the FCoin debacle shows up in the absence of net outflows between April 2019 and August 2019[2]. |
| August 30, 2019 | FCoin Price Crash | The FCoin price crashes[2]. "Buoyed on by the upward trajectory of FT’s price action, platform users were increasing their transactions on the platform, earning valuable FCoin tokens that were likely sold for other cryptocurrencies like Bitcoin. Meanwhile, poor back-end controls on the exchange meant that some users were receiving fee reimbursements in excess of the stipulated amounts prescribed by the model. Then came the crash of FT, with the price falling by about 95%." |
| February 1st, 2020 12:01:35 AM MST | Main Event | Expand this into a brief description of what happened and the impact. If multiple lines are necessary, add them here. |
| February 22nd, 2020 7:45:00 AM MST | CoinTelegraph Article On Collapse | CoinTelegraph reports that less than two years after its launch, Chinese cryptocurrency exchange FCoin has abruptly shut down, leaving customers owed an estimated 7,000 to 13,000 Bitcoin (BTC) — roughly $67 million to $125 million — with potential difficulties in compensation[2]. Founder Zhang Jian, the former chief technology officer of Huobi, attributed the insolvency to poor auditing practices and internal problems rather than a hack or exit scam. However, crypto experts suspect an exit scam as the platform's cold wallet revealed numerous transfers to other exchanges and the destruction of approximately $75 million worth of its native token. The situation has sparked concerns about user compensation and potential legal consequences for Jian, especially given China's stance on cryptocurrency trading. |
Technical Details
And much more in [2]
With events still unfolding, unanswered questions persist about the nature of FCoin’s demise. For one, why was there an increasing amount of net BTC outflows from the platform’s cold wallet while the price of FT was tumbling?
These outflows do not appear to be user withdrawals, given their non-random nature. Data from on-chain analysis shows that the transaction amounts were always nice, round digits such as 100 BTC or 150 BTC. Dovey Wan, a founding partner at blockchain investment firm Primitive Ventures, argued that the orderly distribution of the net outflows is proof that those transactions were not user withdrawals.
In a separate analysis by white hat crypto transaction analyst ErgoBTC, there is evidence that shows every outbound transaction from FCoin’s cold wallet is followed by a 100 BTC or 150 BTC deposit on an exchange such as Huobi or OKEx.
Total Amount Lost
The total amount lost has been estimated at $125,000,000 USD.
Immediate Reactions
How did the various parties involved (firm, platform, management, and/or affected individual(s)) deal with the events? Were services shut down? Were announcements made? Were groups formed?
Promise To Pay Back Affected Users
"Jian promised to pay back affected users, revealing that he was personally overseeing email withdrawal requests from users of the platform. According to Jian, this process could take between one and three months, with the FCoin founder stating that profits from his next venture will also be used to compensate the victims of the crypto exchange’s insolvency[2]."
Review announcement linked from [2]
Initial Attempts To Relaunch The Exchange
FCoin published a statement on February 20th which included the possibility of reopening the exchange[2].
“At present, the social committee and Zhang Jian are discussing the restart plan, and the follow-up will be gradually disclosed to the community according to the process.”
Justin Sun Offering BTT For Poloniex Move
Justin Sun reportedly promised any affected FCoin user 1000 free BitTorrent tokens (BTT) if they moved to the Poloniex exchange[2].
Accusations of Ponzi Scheme Operation
Josh Lawler, a partner at Zuber Lawler and Del Duca LLP, told Cointelegraph[2]:
“The story of FCoin, intentional or otherwise, is that of a Ponzi scheme. The facts and circumstances would be violations of any number of regulatory laws designed to prevent exposure of the investing public to fraud and incompetence. At best, FCoin’s story is a combination of the two. In the digital asset space, it is a cautionary tale as to what happens when undercapitalized and over-exuberant entrepreneurs try to become instant unicorns.”
Ultimate Outcome
The incident was included in the Slowmist exchange list.[3]
Total Amount Recovered
Although a recovery was initially promised, there do not appear to have been any funds recovered in this case.
Ongoing Developments
TBD
General Prevention Policies
When countries and governments prevent legitimate entities from operating exchanges, the result is a market void that is often filled with criminals. Where identities of operators are known and the funds are stored in a proper multi-signature wallet, a situation where one party takes the funds has never happened. You can also be certain that there was no auditing happening, and the exchange likely hadn't contemplated any hot wallet contingencies.
Individual Prevention Policies
No specific policies for individual prevention have yet been identified in this case.
For the full list of how to protect your funds as an individual, check our Prevention Policies for Individuals guide.
Platform Prevention Policies
Policies for platforms to take to prevent this situation have not yet been selected in this case.
For the full list of how to protect your funds as a financial service, check our Prevention Policies for Platforms guide.
Regulatory Prevention Policies
No specific regulatory policies have yet been identified in this case.
For the full list of regulatory policies that can prevent loss, check our Prevention Policies for Regulators guide.