Crypto Exchange FCoin Insolvent After Revealing Up to $130M Bitcoin Shortfall

In a blog post released yesterday, cryptocurrency exchange Fcoin revealed it is insolvent and may default on up to 13,000 BTC ($130 million) in user funds. According to Fcoin founder Jian Zhang, the default was neither caused by a hack nor exit scam, rather it was caused by internal issues related to its “trans-fee mining” business model. Trans-fee mining entailed FCoin issuing FT tokens to the public in exchange for transaction fees users paid to FCoin. The platform would first reimburse the user 100 percent of the transaction fee value in FTs, then payout 80% of the exchange's daily revenue from transaction fees back to users.

According to Zhang, the default stemmed from errors in FCoin's system that began giving away more mining rewards to users than they should have earned in mid-2018. As the FT price continuously declined through 2019, and its community became anxious, Zhang decided to use company funds to buy back FTs on the secondary market further compounding the issues.

Why it matters:

• Users do not own cryptocurrencies they deposit on exchanges. Instead they own a claim to cryptocurrencies an exchange custodies. Exchanges can theoretically do whatever they want with users’ funds.
• The default is one of the better examples highlighting the need for proof-of-reserves, to ensure users have transparency into the solvency of their custodians. Currently, users have no idea whether their custodians are running fractional reserve businesses.