Six days ago Jian Zhang, the founder and CEO of the once enormous crypto exchange, Fcoin, invoked the old western proverb, “the road to hell is paved with good intentions” (“通往地狱的路由善意铺成 .)

“It's time to reveal the truth,” Zhang wrote, in a touching letter. “The truth, even cruel, is better than beautiful lies… I can't watch innocent people being implicated, and good people being blinded [to the truth.]”

His explanation came a week after Fcoin was shuttered, apparently for good, with $130 million of investor funds apparently gone. Though Zhang has claimed he will make good on the losses, his whereabouts are unknown, and investors are understandably upset, And whether his intentions were good, or merely evidence of yet another exit scam is still very much in question.

What happened to Fcoin, the legendary exchange that was nicknamed by fans as the “#1 exchange in the universe (宇宙第一交易所)?” This week’s Da Bing examines the truth and beautiful lies in the story of Fcoin.

Jian Zhang, founder of Fcoin

The truth in “Fcoin Truth”

Zhang is a household name among China’s crypto circles. He was one of the earliest crypto adopters, and created a blockchain explorer ( Qukuai.com) and a cypto wallet ( Kuaiqianbao). Later, he joined Huobi as its CTO. After a short stint there, Zhang started a blockchain technology company called Bochen Tech, and later a token fund called Singer Capital, which also incubated Fcoin.

The exchange, registered in Singapore, launched in January, 2018, and started trading in May. It was a hit within two weeks due to its novel, trans-fee mining mechanism that rewarded 80% of trading profits directly back to users.

At its peak, Fcoin claimed that its trading volume surpassed Huobi, OKex and Binance—combined.

But what went up also came down. Fcoin’s sharp rise reversed in July, 2018 when nearly 10,000 BTC flowed out of the platform—which people believed was a classic pump and dump tactic.

After that, the platform began to falter and lost users.

On February 10, to help pump up the price of its eponymous, token, FT,  the exchange announced it would burn 720 million of them. As I wrote last week, this was in keeping with the increasingly common practice of token burning, which is believed to have been started by Binance: Reduce the token supply and the price goes up.

And it worked for Fcoin—but only briefly. FT’s price surged for a few hours. Then, mysteriously, the entire exchange shut down, seemingly for good.

At first, FCoin told users this was due to “technical upgrades.” But soon, rumors began to swirl on Telegram and WeChat groups, that the token burn actually came at the expense of employees—whose tokens had been among the 720 million sacrificed. Understandably incensed, disgruntled workers shut the site down, the rumors went.

Zhang’s letter, "Fcoin Truth," has made the situation there sound even worse.

Zhang’s explanation

In his letter, Zhang attributed Fcoin’s core issue to technical incompetence—but here, his explanations become confusing, especially insofar as what was “technical debt” and what was financial debt and bad accounting.

The problems started with the launch of the exchange itself. As an incentive to retail traders, Fcoin gave away small amounts of Bitcoin and Ether to FT token holders. But at launch, the platform quickly accumulated a massive debt, which added even more “technical burden” to the back end, which was trying to do the complicated accounting around the trades, Zhang claimed.

According to Zhang, the team “worked day and night” to keep up with its volume, but a small bug in the system was rewarding extra token to certain users. Because there’s no auditing behind Fcoin’s token reward, the additional reward accumulated until it became substantial.

Adding even more confusion, mystery and FUBAR, was Fcoin’s token buyback strategy. That, according to Zhang, was his last resort to restore users’ confidence in Fcoin. Through the buybacks, Zhang and his team tried to create an illusion that FT was high in demand. But it only compounded the  “technical error” because the team was using a “polluted token to buy other polluted tokens,” he said. Again, I’m not entirely sure what he means, but he said the net result was that  some users could cash out more FT than they actually earned. The erroneous  rewards were quickly traded into other tokens, or cashed out, depleting the reserve of Fcoin, he said.

Fcoin’s business was troubled from the start

Zhang’s story centers on the thesis that the Gordian knot that is Fcoin was based on technical issues. That he and his team have tried their best to keep the platform alive is evidence of Fcoin’s “good intentions' ' and deserves to be applauded.

But a closer analysis of funds moving through Fcoin’s wallet raises troubling questions.

According to Peckshield, a China-based blockchain security firm, Fcoin hit its peak volume in July, 2018, only two weeks after its trans-fee mining program was launched. However that sharp rise was followed by a sharp decline, which led to some 10,000 bitcoin being wiped out.

Where did that BTC go? Peckshield revealed that most of the Bitcoin went to other major exchanges such as Huobi, Okex and Coinbase. It’s not clear who these wallets belong to.

After that sharp decline, Fcoin reportedly struggled to compete with other major exchanges, as seen by its low trading volume. In an overly competitive exchange market, Fcoin attracted users in 2018 because it was literally giving away bitcoin and ether in the form of trading dividends. However, rewarding users bitcoin and ethereum in exchange for its own platform token was like trading gold in return for plastic. It wasn’t sustainable.

 

A community based on greed

Fcoin always bragged that it was a community-owned exchange. It claimed that most decisions and new features (such as derivative mining) were proposed and vetted by the community.

But did community members really care about any new features on the exchange? Probably not. Community members cared only about the price of their FT since that was how they got rewarded. Once the rewards were missing, they could easily switch to the other exchanges that offer better benefits.

From a user-engagement perspective, Fcoin’s community’s incentives were misaligned compared to exchange’s. The exchange had to continue the share buyback to keep its customers happy. Fcoin didn’t really offer anything fundamentally unique, aside from its “rewards” program.

Fcoin: Closed for business

A one-man, no show

Fcoin’s fall from grace came as no surprise to many crypto investors. One investor told me,  “Fcoin has always been a one-man show. Zhang does whatever he wants and the result is that he makes mistakes because there’s no checks and balances.”

Indeed, Zhang might have been a solid technical guy as the CTO of Huobi, but he failed to summon a star team that could help him with token design, community management, and more importantly, basic finance and accounting.

The one-man show problem can also be seen from the open letter. No one else was mentioned or made noise since the platform was shutdown. Zhang even said that he will be the sole person to manually process all transactions by himself.

It’s not clear where Zhang is now, but probably not in China. Given that Fcoin has been in arrears since 2018 and on the verge of default, it’s possible that Zhang has left the country rather than face charges.

Zhang however has claimed that he will “take care of the debt,” and “rise back” again. Meanwhile, many retail investors who have millions in funds with Fcoin have nowhere to complain, because no one can find Zhang.

My email to Fcoin’s communications team for comment has not been answered.

The road to hell

Needless to say, many conspiracy theories have sprung up in the days since Zhang published his letter. Most of them believe this was just another exit scam, in which someone runs off with millions, leaving the gullible retail investors holding empty bags. Since the exchange wasn’t really regulated, we have no idea what exactly happened.  “Exchanges are operated on confidence alone,” a crypto friend told me.

In an interview, Zhang said that the F in Fcoin stands for two things. The first is "Finance," a no-brainer. The second is "Future," which seems to be gone. Now that F appears to stand for FAIL, as well.

Do you know?

跑路 which means “running path” is used to describe defaults such as Fcoin. It’s a common expression to describe founders who run away from their financial obligations, once a business turns sour.

Da Bing is a weekly round-up of the most important crypto-related news that happened in China last week.]