The summary of the situation according to Wu:
“On June 24, 2022, the exchange CoinFLEX announced that it made the decision to halt user withdraws, and the price of the platform Token FLEX subsequently plummeted, from $4.30 to less than $1.50 in four hours. At the same time, FlexUSD, the platform’s stablecoin, also began to de-peg, with prices dropping as low as $0.23.”
The funny thing is that both entities were clearly in business together. On May 14th, Roger Ver tweeted, “Interest paying FlexUSD by CoinFLEX is on its way to being the default stable coin for the whole SmartBCH ecosystem if USDT & USDC don’t move quickly.” How did everything deteriorate so fast? That’s what this article’s about.
The story starts with CoinFLEX announcing to their partners that they “opened a special account for Roger Ver.” The account’s characteristics guaranteed that Roger Ver “would not be liquidated immediately if it fell below the maintenance margin, but rather that he would be given sufficient time to make a margin call.” Nothing special here, the man is a high-net-worth individual, deals like this are a dime a dozen in high finance.
As a guarantee, Roger Ver offered “a margin of BCH,” valued “at around $400.” Then, the Terra collapse happened and the whole crypto market crashed. By the time CoinFLEX ”faced a liquidity crisis,” Bitcoin Cash was worth around $120. It’s still at that price range at the time of writing. This is where things get insane. The biggest revelation of Wu’s story is at the end of this paragraph.
“If that were all, CoinFLEX would have been able to cover its shortfall. However, prior to this, CoinFLEX had issued its own stablecoin, FlexUSD, like other exchanges. At this point, CoinFLEX used FlexUSD to buy a large amount of FLEX from the secondary market and opened short position to hedge the spot price. However, the counterparty to this short position was also Roger Ver!”
As we’ve seen happen again and again, “when the withdrawal restriction announcement was made, CoinFLEX’s total funds began to fall in a cyclical fashion.” And all hell broke loose.
Recently some rumors have been spreading that I have defaulted on a debt to a counter-party. These rumors are false. Not only do I not have a debt to this counter-party, but this counter- party owes me a substantial sum of money, and I am currently seeking the return of my funds.
The Bitcoin Cash leader went on the offensive and tweeted a statement obviously written by a lawyer. “Recently some rumors have been spreading that I have defaulted on a debt to a counter-party. These rumors are false. Not only do I not have a debt to this counter-party, but this counter-party owes me a substantial sum of money, and I am currently seeking the return of my funds.” How could those two statements be true? Remember that “the counterparty to this short position was also Roger Ver!”
He had a long track record of previously topping up margin and meeting margin requirements in accordance with this agreement. We have been speaking to him on calls frequently about this situation with the aim of resolving it. We still would like to resolve it.
However, Mark Lamb was not having it. Even though both parties were negotiating, Lamb took to Twitter and stated, “CoinFLEX also categorically denies that we have any debts owing to him.” Plus, “Roger Ver owes CoinFLEX $47 Million USDC. We have a written contract with him obligating him to personally guarantee any negative equity on his CoinFLEX account and top up margin regularly.”
Even if CoinFLEX is right in this instance, did they have to air their dirty laundry in public?
Back to Colin Wu’s newsletter:
“In the end, Roger Ver’s position was completely worn out and turned into negative equity, while CoinFLEX was left with a lot of delisting FLEX. It was revealed that CoinFLEX had a real loss of $120 million, including losses from the de-peg of the stablecoin FlexUSD and the loss of withdrawals (less than $10 million) due to the collapse of the SmartBCH cross-chain bridge, which was built by CoinFLEX.”
And the fact of the matter is that, even if Roger Ver’s debt caused this, CoinFLEX’s risk management team has a few questions to answer. “Roger Ver became almost the only counterparty to the exchange, and this only counterparty had the privilege of not replenishing the margin in time,” Wu concludes. It was an unfortunate sequence of events, but both parties signed those deals and both parties took to Twitter to resolve what should’ve been a private matter.
Shame all around.