CoinFLEX Update: July 9, 2022

Dear CoinFLEX Community,

 

• Firstly, Mark and I are sorry that we are all in this situation. This is not a position we ever envisioned we would be in. We truly apologize for the trauma this situation has caused the CoinFLEX community. It is understandable that you vent your frustration at us and continue to do so when you feel we have not been communicative enough. One of the main reasons for our lack of responsiveness in the last two weeks is that we have been looking for companies/partners to invest in CoinFLEX and have often been under NDAs with them. We aim to be as transparent as possible in this post and going forwards.
• We will explain our plans to recover debts owed to the company (as best as legally we are allowed to do). Details are outlined below. We are looking to raise a significant amount of funds from new investors. Additionally, we are speaking with CoinFLEX depositors who are looking to help the business by rolling some of their deposits into equity.
• We will explain our plans to enable limited withdrawals. Details are outlined below.
• We spoke to a smartBCH representative and welcome the smartBCH Foundation to be a part of the CoinFLEX Stakeholder Working Group to ensure that the community’s interests are being expressed alongside all other CoinFLEX depositors. Unfortunately, the smartBCH bridge will have to remain closed until we resolve all parties’ wishes.
• Additionally, as we navigate ahead, we want to make known a potential long-term partnership opportunity CoinFLEX is exploring. 

As part of the overall process we have today started an internal/external joint group involving some of our largest stakeholders, with whom we are working hand in hand to determine solutions.

 

 

How did we get into this situation?

There has been a lot of commentary on social media around this subject, but it is well worth summarizing our position on the matter:

A large individual customer had a written manual margin arrangement with CoinFLEX. Unlike normal users who are automatically liquidated when their margin ratio goes below our minimum requirements, users on manual margin have a grace period to send more collateral in support of their positions prior to it being liquidated. The customer’s privilege came with a requirement that the customer personally indemnifies us for shortfalls in his account following the liquidation of his positions. 

Unfortunately, this customer failed to honor his obligations pursuant to this written agreement. Our lawyers believe that we have a very strong case and have commenced legal actions to recover debts owed to us pursuant to this agreement. 

 

What are we looking to recover?

It was already very difficult to liquidate collateral in a falling market so we decided that it was best not to make any public comments until we have completed liquidating all available collateral in the account. Unfortunately, there still remains a significant deficit of about US$84 million so we have commenced action to recover this debt.  The first estimate of $47m which we communicated did not include the significant loss in liquidating his significant FLEX coin positions. Now that we have found a bid for that size, the liquidations have created a final deficit of $84m for the account. 

The individual first asked us to liquidate his account, but then continued to tell us for some considerable time afterwards that he wanted to send significant funds to the exchange to take physical delivery of the futures positions. It is clear to us now that he was wasting time and hoping for a bounce in the market that never materialized. We tried to liquidate his account in a prudent manner using counterparts on the exchange but as the positions were so significant, they involved slippage as any large or series of large orders would reasonably create.

Throughout the process, we kept the individual fully informed and he had cooperated with us and promised to pay or increase collateral to cover the shortfall but at the end, the promise proved empty.

We have commenced arbitration in HKIAC for the recovery of this $84m as the individual had a legal obligation under the agreement to pay and has refused to do so. His liability to pay is a personal liability which means the individual is personally liable to pay the total amount, so our lawyers are very confident that we can enforce the award against him.

The arbitration process is not a quick process and we estimate that it will take approximately  12 months prior to getting a judgment in Hong Kong. Thereafter, we will be able to enforce that judgment against his worldwide assets.

Our primary assets are in FLEX Coins and we hold about 26m+ (units) in our inventory. We are concerned that as trading resumes, the price of FLEX Coin may be volatile which may have implications on the value of collateral of our other customers. We believe recovery of the debt will help build confidence in and will help shore up the trading price of FLEX Coin. In the interim, we hope that by providing a fuller picture, and raising capital our customers will regain confidence in the prospects of FLEX Coin.

The vast majority of the receivables in CoinFLEX’s balance sheet is from the debtor we are pursuing, but there are many other accounts that will unfortunately become receivables due to the sharp drop expected in FLEX Coin price when trading resumes. These are accounts using FLEX Coin as collateral.

We will be publishing our balance sheet as soon as we are allowed to. 

 

How are we going to fix the problem?

We are looking to raise a significant amount of funds from investors. We are also speaking with CoinFLEX depositors who are looking to help the business by rolling some of their deposits into equity. There are a number of investors in this group of large depositors who have indicated that they may be in a position to help the business move forward if we can all find a workable solution. We remain extremely encouraged by these conversations.

Recovery Value USD (rvUSD) will most likely be used to improve our liquidity in either the original or modified format.

 

SmartBCH and where do we stand?

We have both been, and continue to be, huge supporters of BCH and the BCH community and are sorry that there is so much distrust of us at this difficult time. 

SmartBCH (sBCH) is a side chain project we have supported from Day 1 as the on-ramp and off-ramp bridge. Like all other CoinFLEX depositors, sBCH depositors must create an account on CoinFLEX and accept our Terms of Service to deposit and withdraw. They are legally treated the same as any other CoinFLEX customer and so we had to halt the sBCH bridge temporarily. 

There are two types of sBCH holders: 1) CoinFLEX depositors and 2) those who own sBCH via DeFi and have no direct relationship with CoinFLEX. We understand why both, and certainly the latter group, may be wondering what this situation has to do with them. 

We spoke today and would very much welcome a representative of the smartBCH Foundation to be a part of the CoinFLEX Stakeholder Working Group to ensure that the community’s interests are being expressed alongside all other CoinFLEX depositors.

The bridge will remain closed until we resolve all the parties’ wishes.

 

Future plans

We are also in close discussions with a large US exchange/ATS platform that intends to enter into a formal joint venture with us as soon as financing is achieved. 

We are excited about this possible joint venture arrangement as this would result in the launch of a stock (US equities) repo markets and deliverable perpetual futures platform, leveraging CoinFLEX’s unique IP and technological platform.  Securities lending is a $2.5 trillion market controlled by a small handful of prime brokers. We see great potential as there is no exchange platform for securities lending today.  

Our intention is that this joint venture will initially be through our partner’s already established offshore license with the intent to migrate to the USA using the multiple licenses that our partner already has in place. 

 

• Initially, this would begin using their offshore licenses 
• Over time, this would migrate to the USA (onshore) using the multiple licenses that they already have in place 
• Also provides a source for securities holders to earn yield the same way flexUSD earns yield

 

 

What are we going to do in the meantime?

 

CoinFLEX Stakeholder Working Group

We have formed a stakeholder working group with some of the largest stakeholders (depositors) on CoinFLEX. This group will be a key part of what route we decide to go down when we look at potential solutions. They may well reach out to you guys for general community guidance in the main telegram chat as everyone’s views are important when looking to resolve this difficult situation.

 

Locked Funds Plan

The ongoing discussions with existing creditors, new investors and others will take many weeks and so we wanted to come up with a plan to create some temporary liquidity for CoinFLEX depositors. We will be looking to make available 10% (and more later) of balances available for withdrawal. This does come with some implications that we wanted everyone to be aware of:

 

• Although you will see them in your balances as locked funds, they will not be available for withdrawals nor will they count as collateral. On the date we implement this plan,  we will  temporarily close trading and will close off all long and short futures positions against each other. After this is done and verified we will then re-open for trading.
• As the outcome of the recovery plan is still uncertain and as we need to raise or recover funds in USDC, we will also likely ( subject to getting appropriate legal advice on this) need to sell all the locked assets, except FLEX and flexUSD, into USDC. As the funds we are looking to recover are in USDC, we need to dollarize the obligation to confirm the total amount of the liabilities.  This will allow us to clearly determine the exact amount of obligations/liabilities for each user.
• For example, Bob had 1 BTC, 10 BCH and 10,000 USDC in his account, with BTC priced at $20,000 and BCH priced at $100. After that, Bob’s withdrawable/available balance will become 0.1 BTC, 1 BCH , 1,000 USDC and a locked balance of 27,900 USDC.
• If we do not sell the coins while BTC has moved from $20,000 to $100,000, we would have to recover 0.9 BTC for Bob that is worth $90,000, while the USDC debt that we recover might not be able to cover the BTC required.

 

Please note that significant technology, operational and legal work are required to put all the above in place, so we expect implementation to take a week (hopefully sooner). 

We will also be calculating all the balance adjustments during the week and publishing our balance sheet alongside once that is done. Once this is fully verified and after the first withdrawal process is successfully implemented, we will look to make additional balances available for immediate withdrawal.

There are several moving pieces in the plan and, as such, they are subject to changes as we get more information.

 

Sudhu Arumugam and Mark Lamb

CoinFLEX Co-Founders