NOTE: THIS APPROACH HAS BEEN SUPERSEDED BY THE SCHEME OF ARRANGEMENT.
Dear CoinFLEX Community,
During the recent market volatility, a long-time customer of CoinFLEX’s account went into negative equity, meaning the Individual’s account currently holds a negative balance. In response, CoinFLEX made the decision to halt user withdrawals starting from June 23rd, 2022. As an exchange, we never want to put users in such a position and regret having to resort to these measures in order to work toward resolving the issue.
In normal circumstances, we would auto-liquidate a position that runs low on equity at prices prior to the zero-equity price. In this case, the Individual had a non-liquidation recourse account. This condition required the Individual to pledge stringent personal guarantees around account equity and margin calls in exchange for not being liquidated.
Solution for Re-enabling Withdrawals
As a solution toward re-enabling withdrawals, CoinFLEX is planning to monetize this personal guarantee by creating a corresponding liability in the form of a token called Recovery Value USD (“rvUSD”).
We have been speaking to potential large buyers and believe there is significant interest in the terms presented.
We are still targeting withdrawals for Thursday, June 30th 2022; however, this will be subject to receiving funds pursuant to the rvUSD issuance. If the rvUSD token issuance is fully subscribed, CoinFLEX will re-enable withdrawals and restore the platform to full functionality in an orderly manner.
Manual margin and credit lines are common practices with institutional-sized traders in the crypto and traditional markets. Notably, the Individual had consistently met every margin call before this incident. However, what this experience has taught us is that crypto markets may move too sharply for manual margin arrangements to be effective. We never want to operate in a manner which negatively affects the ability of our users to utilize our platform such as restricting their ability to withdraw. We understand the impact this has had on our users and must ensure that this is something that can never be repeated.
We want to reiterate that this Individual is a high-integrity person of significant means, experiencing temporary liquidity issues due to a credit (and price) crunch in crypto markets (and non-crypto markets), with substantial shareholdings in several unicorn private companies and a large portfolio.
There are no other accounts on CoinFLEX that are in negative equity.
Long-term Transparency Plan Around Futures Margin:
CeFi exchanges and lending platforms are vulnerable to a lack of transparency. In particular, traders have enormous privacy around their position sizes, margin ratios, collateral types, and any privately negotiated arrangements with the exchange (such as non-liquidation accounts). This often results in a lack of trust as the public has no visibility into the safety and health of any given exchange venue.
DeFi is on the other end of the transparency vs. privacy spectrum, where lending platforms like Aave and Compound make a borrower’s liquidation price 100% publicly available to anyone and everyone. The downside to the leveraged borrower is that they can be “stop hunted,” which means that traders can try to move the market down or up to the borrower’s liquidation price for the traders to profit from said liquidation.
CoinFLEX will be pioneering a new model of futures margining in direct response to this incident. The notional (USD) value of every account’s futures positions will be made publicly available via an external auditing firm that will attest to these futures positions every hour. We will also make available the margin (collateral) backing these positions in USD value and break down the collateral by type 1 (stablecoins), type 2 (highly liquid coins), and type 3 (low liquidity coins).
Although the data will be anonymized, we understand the publicity of this information will come at some expense to traders’ privacy. However, exchange depositors will benefit massively from the greater transparency. The data will give a potential user of CoinFLEX insight into how risky the platform is, how leveraged the users are, and whether any liquidations occur at a loss to the platform. This transparency would ensure that losses the platform incurs from liquidations will be made immediately visible, making it impossible to allow non-liquidation recourse accounts.
CoinFLEX will be implementing this as a priority following the restoration of withdrawals. We believe this is the best possible solution for futures traders to be comfortable holding large open interest on the exchange and, more importantly, for building up the trust of CoinFLEX users moving forward.
We thank the community for your support.
Mark Lamb, CEO