Tron founder Justin Sun got himself involved again into yet another controversy as he posted a “well wishes” message for FCoin scam on Twitter. According to the tweet in question, Mr Sun declared FCoin CEO ZhangJian his close friend and said that he can relate to the hardships, which he must have faced building his business. Mr Sun then proceeded to sympathize with the affected people, before engaging in opportunistic behavior and inviting the affectees to join Poloniex (acquired by Tron earlier) by offering them 1,000 BitTorrent (BTT) tokens per sign-up.
(1/2)The news of @FCoinOfficial overwhelmed me with grief. ZhangJian is my close friend. I can relate to the hardships he has gone through creating his business, and I feel extremely sorry for the users’ losses.
Life is sometimes ruthless while the #crypto world is full of love.— Justin Sun (@justinsuntron) February 18, 2020
(2/2) I contacted @Poloniex and we decided to launch a campaign. All Fcoin user who signs up on https://t.co/R8Da6OGwNv (https://t.co/gLpUVw66wR) can claim 1000 $BTT.
Despite the small amount, this is our token of gesture to recover the loss for users of the #crypto world!— Justin Sun (@justinsuntron) February 18, 2020
Considering the fact that FCoin is a proven pyramid-scheme scam with a culpable team, such kind of behavior and conduct, coming from a prominent crypto-leader and owner of a major blockchain project is unacceptable and in bad taste. Justin Sun should have been more careful in its approach. Also, this wasn’t an opportunity to promote Poloniex exchange for any reason. Therefore offering affected people BTT in exchange for joining the owned exchange, isn’t a show of good faith, by any means.
What’s The FCoin Scam?
FCoin scam relieved investors of as much as $128M (the actual amount hasn’t been determined with certainty, but is likely to be higher) after the exchange announced that it had become “insolvent” and can’t process user withdrawals. The former Huobi Chief Technology Officer (CTO) ZhangJian, who founded the FCoin exchange employing the “trans-fee mining” model announced in his message that the biggest problem FCoin faces isn’t with restoration, but with the fact that the platform can’t pay its users back.
The scale of non-payment was estimated to be between 7,000-13,000 BTC (between $69M to $128M at current rate of $9882 per Bitcoin) by him. He added that its a complex error which can’t be explained “in a single sentence”. ZhangJian confirmed that the exchange wasn’t hacked or faced an internal volume run, but this outcome was a result of data error plus decision error.
The exit scam was executed in an orderly pattern. First, the team announced that they are adjusting the revenue distribution rules (Tweet link). Secondly, they announced the destruction of all team held FT tokens (Tweet link). Thirdly, the system upgrade notification was sent (Tweet link) and the time-frame extended shortly after (Tweet link). Afterwards, the team announced that “severe damage to systems and data” has occurred which was “impossible to recover in a timely manner”, however they are still working to fix it, to reduce risk to platform users and withdrawal can be requested by mail (Tweet link). Then came the final message that the exchange and the project is shutting down, which is discussed below.
The FCoin’s Founder Mr ZhangJian’s Incoherent Explanation
The explanation provided by Mr ZhangJian is neither coherent nor makes much logical sense and can easily be dismissed as sugar-coated propaganda. He seems to be blaming a lot of things, in his post, as to why his exchange fell apart. Initially, he blames high volume of interest and users, which he and his team weren’t able to handle. He then proceeds to give an account of the initial days, where were chaotic and resulted in tremendous pressure/stress, because of the highly dynamic and rapid activity. The team requested him to slow down activity and to postpone daily dividends, since the state of the system had become high-risk and was on the “verge of collapse”. However, the postponement of dividends, according to him, caused a major decline in the value of the platform’s native FT tokens, which were used for activity on the exchange and paying dividends. He was forced to scale the activity up, burdening the system again and therefore allowing no time to deal with background problems.
The second error he blames is that the improper un-audited system allowed “larger payouts” than were warranted. It means that the system paid certain participants more mining returns and dividends than they should have been paid. In his opinion, by the time they came to know about this, it had already resulted in tremendous damage and caused “pollution of assets” – a fancy term for not having enough reserves to fulfill obligations. A lot of users and institutional actors using the platform, had already withdrawn high amounts of mining returns and dividends, having never been audited properly. He again blames the high activity for the reason that they couldn’t properly investigate and find a solution to this problem. The platform never had proper data tracking and analysis functionality for the most part, which became available late, when the damage was already done.
Mr ZhangJian further notes that the FCoin team and he himself engaged in continuous buying of FT tokens in a desperate bid to raise price of the token and improve the situation. This caused the third major problem – the depletion of already low monetary reserves. Also, the buying back of FT tokens, to solve the “polluted reserves” problem, resulted in FT tokens also being tainted and becoming a part of the problem (and thus also becoming polluted). The problem was worsened by the long-term bear market and revenue wasted during re-purchasing FT tokens. According to this long message, he’s deeply sorry, apologizes to the team and all the users. He hopes to start a new project and pay back the FCoin affected users through revenue generated from that project.
What Really Happened To FCoin?
Since its launch in May 2018, FCoin had all the telltale signs of being a scam, from the beginning. The platform and the project didn’t pass the scrutiny of multiple analysts, who criticized it because of lack of clarity and unsustainable business model.
I rarely called out anyone, with exceptions. On Chinese social media, I called FCoin a pyramid scheme in mid 2018. Their founder call his own plan a “better invention than #Bitcoin“. That did it for me. Who would say such a thing? About themselves? except scammers. https://t.co/oNbZyDDkZe— CZ Binance 🔶🔶🔶 (@cz_binance) February 17, 2020
The FCoin’s disputed “trans-fee mining” model was introduced to reward people trading on the platform and for issuance of native FT tokens. According to the model, the trading fees, paid in stable cryptocurrencies like Bitcoin or Ethereum, would be given back to the user, in the form of FT tokens, until the distributed token percentage reached 51% of the total. FCoin also distributed 80% of the revenue to the users holding the token, with gains distributed daily. 51% of the FT tokens were therefore distributed without any Initial Coin Offering (ICO) or airdrop to the public.
Even though the exchange team claims that they are insolvent, they are requesting users to manually request withdrawals, which will be partially sent in the coming months. Despite the FCoin CEO claiming that they don’t have enough funds, a crypto analyst, advisor to Coindesk and founding partner at Primitive Crypto Dovey Wan has noted that funds from the ill fated exchange have been already sent to major exchanges for liquidation, further lending credibility to the fact that this was an exit scam.
WTF tracking on Fcoin’s Bitcoin cold wallet shows the majority of its asset has been transferred to other exchanges …address: 12rU7whLERNrkDb8bTe9VJJSKZvCXy7dj7
They said they can‘t withdraw for its users???
What a SHAMELESS scammer
(visualization done by @ChainDotInfo) https://t.co/xfVAk8OzBH pic.twitter.com/0LWNVVTcMx— Dovey 以德服人 Wan 🪐🦖 (@DoveyWan) February 18, 2020